One of the most important tools we have as technicians is the ability to measure momentum. Remember, buy side fund managers are obsessed with looking for stocks and assets showing momentum. They hate sitting in things that aren’t doing anything. Whether you’re a buy side fund manager or not, it’s important to think this way. Opportunity cost (where else you can invest that money) is important too. Looking for stocks with bullish momentum characteristics is something we want to do when markets are in an uptrend. When momentum starts to fade, it’s a heads up that price is likely to follow.
Today I want to focus particular attention on the breadth of momentum. We want to approach this as a market of stocks, not a stock market. There are many components that drive these indexes, sometime more than others depending on the index. We can focus on particular areas like energy or financials, or different market caps large or small. I also want to know how momentum in the entire market is doing: Are we seeing positive momentum characteristics or negative ones?