Trading On Momentum (1)

Momentum traders run with the herd. That’s not a bad way to run, because all stocks tend to move in line with the DOW on most days. Another way to look at it: Three quarters of stocks typically move in the same direction as the general market.

Fundamentally, there’s usually no rhyme or reason to these kinds of strong bull markets. After all, how can we assume that some clothing manufacturer from Hong Kong is more valuable as a company simply because Boeing and McDonalds had a good quarter? For this reason, momentum traders get in and out of trades on a short term basis in order to exploit the inefficiencies of this very type of market.

In Part 1, I’d like to look at a few stocks that are in the midst of a strong bullish movement, and in Part 2, I’ll reanalyze these stocks and see if the bullish movement has stopped, indicating that it’s time to sell or even short the symbol.

SSYS – The bullish movement of Stratasys, Inc (NASDAQ: SSYS) is confirmed by a look at the 9-day and 21-day moving averages.

Since its crossover on the 1st of September, the 9-day moving average hasn’t slowed down to match the 21-day moving average. This is a strong charting indicator of a bullish trend.

LVS – Also showing a bullish trend, you can see here where the Las Vegas Sands (NYSE: LVS) stock corrected on the 1st of September as well.

For the simple moving average chart, the indication that a bullish trend has begun is the crossover of the 9-day moving average. If you want to get really accurate, you can also take a look at a 3-day moving average or aHeikin-Ashi candlestick chart (pictured) and look for an even better buy point. The Heikin-Ashi candlestick is an excellent chart for short-term traders, because it helps visualize the best trends earlier than a traditional candlestick.