Total Market Momentum (Rate-of-Change)

The much respected market technician, Martin Pring, describes momentum as the "velocity of a price trend."  One of the best technical tools in measuring this velocity is a Rate-of-Change (ROC) oscillator.  The oscillator measures the maturity of a price trend based on crossovers of its equilibrium line (zero-line) into positive (bullish) territory, or negative (bearish) territory, and the distance from zero.  

We base our forecasts for total market momentum using the Dow Wilshire 5000 Total Market Index (DWC), for very obvious reasons.  Besides it's name, it's the closest thing we have in the U.S. to a single, pure stock exchange, as it is composed of over 6,500 stocks listed on the NYSE, NASDAQ and AMEX exchanges.  It's one drawback, perhaps, is that it is capitalization weighted.  A dollar weighted (or better, unweighted) index would be most ideal for this analysis; nevertheless TMWX serves our purposes for a look at the total market.

The Rate-of-Change charts we present take a Long, Intermediate, and Near term view of the total market's action.  We present the charts on one page for each of the different time frames, as it allows a variety of analysis in interpreting the data, as noted below:

1) The most important changes in trend occur when the ROCs for all three time frames are trending in the same direction.  Because the near-term ROC is more useful for short-term timing, there will always be a bit more whipsaw relative to the longer time frames.  What is most key is the position of the long-term ROC, since it defines the overriding trend.  For different reasons, the long-term ROC generally lags its faster and more recent counterparts, but when it makes a decided change of trend, it has the greatest significance and implications for the market.  So, when positioning short or long, you want to take note of where the long-term ROC is, and follow the nearer term ROCs as they move into overbought or oversold levels. Since these vary with the time frame, I periodically apply trendlines to note these extreme points when they occur.

2) Crossovers of the equilibrium line are also more significant on the long-term and intermediate charts.  They're also useful for timing on the near-term chart, but not by themselves.  In all cases, the further from the equilibrium line, the more mature the price trend in effect (and an alert to a potential reversal).

3) We also want to look for divergences between the ROC and the price trend.  If, for example, price is still rising, but the ROC is dropping, it suggests price is losing velocity, with fewer gains being made on a daily basis.  This is an impending sign of a reversal, and if it occurs in all three ROCs, then it portends an important reversal in the market. The reverse, of course, is also true.  If all three ROCs turn up after a period of intense selling, with higher lows being registered, then it's likely signaling the beginning of an important uptrend.

The ROC, especially on a short-term basis, should definitely be used in combination with other indicators.  It's a good indicator, but it isn't flawless.  As Martin Pring writes, the "weight of evidence" approach is always the best way to go.

Click the links below to see the Total Market ROC, and other momentum-based indicators.

Total Market ROC

KST Indicator

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