Traders like to use technical analysis to identify short-term overbought and oversold levels, short-term breakouts and targets, and short-term trends. Technical analysis can also be used to identify long term, secular trends, and this can be done with momentum.
Momentum measures the rate of change of prices between two time periods. Hence, the annual momentum indicators of several blue chips, which are index components, rose sharply this week (March 5–11). This is because the markets were falling a year ago.
As a result, the annual momentum indicators of DBS Group Holdings, Oversea-Chinese Banking Corp, United Overseas Bank, and the Jardine group of Jardine Matheson Holdings (JMH) and Jardine Strategic Holdings (JSH) all rose. These are the heavyweights of the Straits Times Index (STI). No surprise then that the annual momentum of the STI also rose this past week partly because the market was falling a year ago, and also because its components are rising.
That JMH rose because of its offer for JSH was just a coincidence. These two stocks would have risen irrespective of the privatisation offer. They have risen simply because their annual momentum indicators have strengthened. But, as some bloggers have observed, short term indicators are at overbought levels, and short-term black candles have appeared here and there. These underminings should cause a temporary retreat.
Momentum should be thought of as waves in the ocean and on the sea shore. Anyone who has been to the beach will see waves breaking as they reach the shore. Often these are manageable for the folks on the beach. Once in a while, a large wave breaks. More rarely will a super wave come along.
Momentum and shortterm indicators are like that. The five-day and 21-day indicators are the small waves arriving at the seashore. Bigger waves come around once or twice a year, depending on weather cycles. Sometimes, a tsunami happens.
The big seasonal waves can be viewed as longer term momentum, perhaps a one-year momentum. The tsunami could be thought of as a two-year momentum. These big waves sweep everything in their path.
Back to the market. Yes, DBS is overbought based on short -term indicators. DBS has formed a black candle — but a solitary black candle. So a short-term pulback is inevitable. DBS’s annual momentum is rising strongly and its twoyear momentum is recovering. One of the tenets of Dow Theory is this: a trend is in force till it shows definite signs of a reversal. So, the best move is to stay with the trend.
A year ago, the STI broke down from 3,018 as Covid-19 turned into a pandemic and spread through the US in February and March 2020. The STI is likely to continue to benefit from these declines a year ago, as annual momentum rises into positive territory. Two-year momentum has also turned up. For the STI, the next resistance is at 3,368 to 3,377, an area that was tested twice in 2019, but which the STI was not able to successfully challenge. It could well challenge this resistance zone this month, given that its two-year momentum is rising in tandem with its annual momentum. Based on momentum indicators, DBS has greater strength than the STI.
The cycle for the US market is different. The Dow Jones Industrial Average started to recover in April 2020, suggesting that the US market could head into some turbulence next month. The local market struggled last year and languished from July to November. That bodes well for local blue chips this year
