NewMoMo - All Indices

The only thing I'm missing is the mid-cap. Mid-cap is the best performing class of stocks this year to date - why is that? I don't know - no one knows - it's just a fact.


What this shows is that three of the four have rolled over the top and are now heading back down which is why I'm calling for a down day on Monday. But I think because this is end of the quarter and the last week at the end of the quarter is usually pretty good (about 60 - 40 up) barring catastrophe this could be an up week overall. Friday is, after all, hedge fund manager bonus day and vacation season is upon us and 90 percent of the hedge funds out there are simple stock funds with a couple of options thrown in and so the market must go up. But first - it must go down.

Using NewMoMo

SweetTrend asks - "Have you used this indicator on intraday data?"

I don't have a data feed for intraday and I don't feel like paying for one - I've got my useful tools that I use intraday - BOB, the three EMAs and Pivot points and those are sufficient for day trading.

These tools (NewMoMo and Marlyn's Curve) are used for the macro approach - NewMoMo is especially helpful in establishing trades overnight going into an up day the next morning. I put in the DIA price at about 3:45 every day and check the way the wind might be blowing the next day. For example the NewMoMo turned up on Monday afternoon which gave me a signal to buy for Tuesday. What I did was add to my holdings and made some extra alpha as a result. Now you can look this up if you care to check it - here we have an indicator that actually turned up when the market went down. That's right - on Monday the DIA closed at 120.30 or 66 cents below Friday and this indicator turned and went up. Why is that?

Most momentum oscillators measure the momentum of price changes. One of the important things to remember about NewMoMo is that it is measuring the momentum of a volatility signal (which is what the normalization gives you). And volatility is probably the most important thing we can measure in a market (or just about anything else for that matter).

NewMoMo is the logical next step from Marlyn's Curve. Consequently what NewMoMo saw on Monday was the fact that volatility was changing. And that is what I've been preaching forever on this site. You can't have enough insight into volatility and the VIX, while handy, don't get it for trading.

I originally invented Marlyn's Curve to take advantage of the Rydex dynamic and inverse funds - it worked pretty well in that regard. That's what that picture is up in the right corner - the 6 Rydex originals - 3 dynamic and 3 inverse. NewMoMo is just the next logical step in the progression. I'm sure there will be other ideas to come along - I will just keep fiddling and eventually they will happen.

I know that's a bit far afield from the question but I felt it needed to be said and this was as good a time as any to say it.

NewMoMo - Explained

Because you asked here it is in all of its complexity. If you stick with this explanation and actually build your own model you better watch out – you may want to start developing your own indicators and next thing you know you will never use RSI of length 14 again.

You will need several hundred data points (daily closes, average temperatures, gallons of gin, whatever) to achieve a comfort level with the output.

There are a many ways to get the data sets you need to seed your program and a number of ways to keep them up to date once you have the beginning set. I use Yahoo finance and their historical data function to get large quantities of data quickly. I download these data points to an Excel spreadsheet. Then I update my spreads daily by hand. I could buy an automated update but I’m not frugal – I’m cheap.

Once I get a sequence of closing prices I normalize the list. By this I mean that I divide the most current value by the average of the last 20 values on the list. That gives me a percentage value for the day that reflects the relationship of that data point to all the others of the last 20 days. Now this is important – do not include the current day in the average – it is the last 20 days - not today and the last 19 days. I have found that by normalizing prices in this manner and then smoothing the output I can compare all manners of stocks, indices and so on. As long as it is a sequential data set it can be compared – sometimes it isn’t as crisp as you might like but most often it describes what you need to know. I settled on 20 days because my testing and other research suggests that the market operates on a 20-day cycle.

I then derive a 4-period exponential moving average of the list of normalized prices. The way this is done is to go down into your data set several hundred items to a logical starting place and get a simple moving average of 20 normalized prices. Then you find your exponents.

You derive exponent 1 by taking the length of the desired average, adding 1 to it and dividing the sum into 2.

2/(length+1) = 2/(4+1) = .4

Exponent 2 is simply:

1 – exponent 1 = 1 - .4 = .6

Then starting with the original simple moving average you multiply the next normalized price by exponent 1 and add that to your moving average multiplied by exponent 2. In other words you are taking part of the old and part of the new to form the next average in your list.

Example:
Next normalized price on the list = 1.0004351
Last moving average on the list = 1.0235303
Find (1.0004351 * .4) and add the result to (1.0235303 * .6) and that will get you 1.0142922.

If you are still with me good for you – if not – I understand.

At the end of this process you have a list of exponential moving averages going back into however long you wanted it to go. I have some that are thousands and thousands of entries long. It is, after all, the basis of Marlyn’s amazing Curve. And allows you to do these kinds of comparisons –

Now we are ready to devise the NewMoMo indicator. Using the Excel min/max capability I first find the maximum of the last 5 days of the exponential averages and I record them in a separate column. Next I find the minimum of the last 5 days of EA and record them in a second column. I do this for however many entries I have in my exponential average list. Then I simply subtract the max column from the exponential average column and put that in a column by itself. I do the same for the min column and put that in a column by itself. Note that the max column will either be a negative number or 0 and the min column will either be a positive number or 0.

Then using the charting capability in Excel - I output a chart of NewMoMo from the two columns I just formed of any length I desire.

This shows two years of DIA using weekly data. You can see on the weekly basis we haven't rolled over going up yet and this, in fact reflects that flattening that I've been talking about for the past several months. Once the bar turns up we will probably have many weeks of recovery ahead of us. Of course nothing is certain and the next bar could be down as well as up but that remains to be seen next week.

Here is a screen cap of the top 20 lines or so of one of the spreadsheets I use with the annotation of the formula.

To test this I use a spreadsheet capability that permits me to enter a bar number from the NewMoMo chart and then I can see how the next several days, weeks, months react given a positive or negative bar of length x . The output of that looks like this –


Well that's probably as clear as mud - it isn't easy describing stuff you do automatically but when I began this quest I started with an empty spreadsheet and an empty mind and look what obtained. Imagination - it is the stuff of magic.

Wrapping Tuesday

Another one-hour day. That's pretty much it any more - the market spikes and then drifts back down, touches the EMA 8 or 21, spikes again, then more drifting. Tough way to make a living.

I got back about 80% of my profit on LQDT this afternoon when it printed a blow-off bottom on the 15's. I got in at 19.20 - rode to 19.90 and when it pulled back to 19.80 I was out. I don't think it is going to recover soon - it might have an up day tomorrow, and might even have a gap up on the open, but the sell off today was relentless and very, very angry. Usually in the secondary offerings you get one gap down and you sit and wonder what happened - this was a gap down followed by relentless selling starting about 10:30. And the only thing that happened was the volume kept increasing. Four times normal volume and that doesn't speak well for their plan. This could have been simple short selling but I don't think there were enough up-ticks to make that possible. Tomorrow will complete the picture and we'll see then if all is forgiven.

There's been a lot of angry selling lately - AOB has been on the bad end six of the last seven days - although today looks like it is finally bottoming. I'll be watching this one for tomorrow and see what happens. This was another stock where I took a "secondary offering" beating a couple of years ago - it still owes me money. At least with LQDT I'm a bit ahead of the game.

CRVL we've discussed several times - and it is toast right now - at least the volume is drying up some. And there was some nice action in the last 45-minutes. They finished today with a nice DOJI too and that might mean that the sell-off is over for the time being. But as I've said before unless they come up with another buy back plan they are probably going to keep going down.

But they're not the only ones - AMD keeps getting hammered day after day - as does NTRI. But NTRI also formed a nice DOJI this afternoon. I don't know if these DOJI are significant - there are a lot of them and they don't necessarily have to mean a bottom. They might - that's all I can say.

HANS looks like it has blown its top (not a blow-off top but a blown top) and it shaved 9% today. I mean this is a day when the markets were going up and all of this carnage was taking place among the darlings.

Gold has been going up quite a bit lately - the problem with gold is that the miners go with the metal and with the market - if the metal is down - the miners are down, if the market is down - the miners are down. The only time the miners go up is when the market and the metal go up together - like today - but most of the major miners (sorry Mom) formed gap-up DOJI and that might spell trouble.

GOOG gained 70 cents today. I don't know whether to laugh or cry about that. That was 0.16% which I'm sure made some fund's quarter - I'm also pretty sure that it wasn't the "short squeeze" that Jimmy Crack Corn Pone predicted.

AAPL continued its losing ways but you know how I feel about AAPL. It is probably done for all time.

The semis are done - here is a "maximum top" from last week.



You see on 2/01, 2/02, 2/05 three gaps and a DOJI - classic maximum top. It tried to get over it but it couldn't. If the semi's are done - tech is done - it's pretty clear. Have you looked at a SYMC chart lately? It's been trading between 17.60 and 18.00 for a month now - that's a 40 cent range. Oh well, just as long as they keep paying that dividend. Oh - that's right SYMC is another one of those tech stocks that has been around forever (1990), backdates options, and doesn't pay a dividend. Tell me - exactly what part of a 40-cent wide daily range makes this piece of crap a "must buy"?

MSFT is fighting back but swinging like the little old lady it is. It will fight all week to pin at 30 and once it has caused maximum damage to the options trader's accounts it will resume shuffling down the hill. Mr. Softy is another one - the sizzle has already been sold and nobody is buying the Bull.

And I'm saying all of this on a day when the INDU is up 100 points - I must be absolutely nuts. But that ATR-less-than-80 indicator that I wrote about last week worked like a charm - the INDU ATR(10) went below 80 last Thursday and took the INDU down through the EMA 21. Once the INDU closes on or below the EMA 21 it goes back up again. Maybe the market is just fine and some of these mature stocks are just that - mature stocks. Time to start looking for fresh meat.

Took two swing trades today - RX and CRI. Both of them breaking out and they look like they might be able to make a couple of points in the next month. I have a feeling I'm going to have to hold them for awhile.

I'm dropping the new 20-period high/low ratio because it doesn't seem to be a good predictor - certainly not as good as the ATR indicator I found last week. The up/down ratio is a relatively good indicator as is the Newmomo indicator below. So I'm going to be using these three plus the VIX for forecasting from now on and I'm dropping the last hour indicator also - unless it is five reds or white/greens. Those two configurations actually have meaning for the 'morrow.

So saying for tomorrow the up/down ratio is printing 59% which is neutral and the VIX is back in neutral territory, the INDU ATR(10) is above 80 and the Newmomo indicator still reads bullish.

Thus while it doesn't necessarily have to be an up day tomorrow - I think it will be.



The coin is saying --- heads - also forecasting an up day.

We now have the score as Marlyn 11 - 8 and 4 and the coin is 8 - 11 and 4.