Q: Please explain how to use indicators to determine a momentum peak. How do you know if it is too early?

A: The best indicators for determining momentum peaks are the banded oscillators such as Stochastics and RSI. Banded oscillators fluctuate within a set range, and have specific overbought and oversold levels. Stochastics fluctuates between 0 and 100 with readings above 80 considered overbought and readings below 20 oversold. RSI fluctuates between 0 and 100 with readings above 70 considered overbought and readings below 30 oversold However, these oscillators can move to overbought (or oversold) levels and remain so for extended periods while a security continues to rise (or fall).

One method of preventing early entry is to wait for a positive or negative divergence before acting. Another might be to wait for a MACD moving average crossover. MACD, which is not a banded oscillator, fluctuates above and below zero without any upper or lower limits. In addition, MACD uses moving average and has trend-following characteristics, something RSI and Stochastics do not have. You might try looking at RSI and Stochastics to determine overbought/oversold levels and then use MACD moving average crossovers to confirm signals. This would allow for a later entry point and confirm that the shorter moving average had turned up.

For more, check out our Education Center articles on Oscillators, MACD, RSI and Stochastics.

Cheers
Arthur Hill

Q: When a trendline is broken is it necessarily the case that a new high/low must be established in order to progress?

For example, on the Nasdaq ($COMPQ) I see the May 24 upline broken. A reset comes below 3042. By going below 3042 the October 18, 1999 upline from 2632 must be broken. Does this lead to an increased possibility that 2632 must then be reset (crossed below)?

Also, a bit odd that October 6 low on Nasdaq touched this October upline at 3317, and that the $INDU closed a few points over its October 9 1998 upline on a weekly chart. This line too would need to be crossed to correct the broken March 00 line (a la the Nasdaq).

A: A trendline break provides the first indication that the current trend is in trouble. However, a change in trend cannot be confirmed until the previous reaction low or reaction high is taken out.

For example: One could call the intermediate term Nasdaq trend bullish from May to August of this year. At the end of August, a lower high formed at 4260. In September the trendline extending up from late May was broken. And finally, the previous reaction low at 3521 was taken out with last week's decline. Technically, the intermediate trend changed from bullish to bearish. An uptrend can be defined by a series of higher highs and higher lows, and a downtrend by a series of lower highs and lower lows. The Nasdaq failed to form a higher high at 4260, broke the May trendline and broke below its 3-Aug reaction low.

On a longer term scale, the Nasdaq formed a lower high at 4289 (below the March high at 5133), but still remains above its previous May low of 3043.

Cheers
Arthur Hill