be used to describe acceleration; when the rate of change is zero, we aretalking about speed and momentum.
You will see in this chapter that speed-is a more sensitive measurement than pricelevel, and acceleration is more sensitive than speed>The-various techniques described hereare presented in order of speed and then rate of change. Following that is divergence, themost popular use of momentum indicators.
Te study of momentum and oscillators is an analysis of price changes rather than
MOMENTUM
Momentum is the difference between,two prices taken over a fixed interval. It is anotherword for speed, the distance covered over time. For-example, today’s 5-day momentumvalue M would be the difference between today’s price P, and the price 5 days ago:MOMENTUM ~ 127
a SSSFSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSeeeeeeeeeeee(5-day) M =P, ~ P,_5
Using notation familiar to many programmers:
momentum = price ~ price([5]
or
momentum = price ~ price(NJ
where the notation [N] refers to the (closing) price N days ago.
The momentum value M, increases as the change in price increases over the 5-dayeriod. Figure 6-1 shows that momentum is also related to slope; that is, a faster priceincrease will cause both angle @ to become larger and the hypotenuse of the triangle,
‘ked “momentum,” to increase. If the 5-day momentum is 100, the slope of the momen-
m line can be expressed as 100/5 = 20. If prices had increased by 150 points over thesame time interval, the slope would be 150/5 = 30 and the momentum would be 150.The 5-day momentum M, can range in value from the maximum upward move to themaximum downward move that the price can make in 5 days, the momentum is zero ifprices are unchanged after 5 days. Figure 6-2 shows the possible moves in the momentumcalculation. Consider a commodity with a 20-point daily limit. Starting at point A, the 5-dayprice change increased at a faster rate for 8 days (up 2, up 4, etc.) until at point B, priceswere moving at their fastest 5-day rate. At point B the 5-day price change was three-fifths ofthe maximum 100-point change, or 60 points. From point B to point C prices stillincreased, but at a slower rate, until the 5-day difference at point C was zero. Prices thendeclined at an increasing rate until at point D the maximum 5-day decline of 40 points wasreached; at point E the 5-day difference was again zero. Note that at point B prices did notstart down but only increased at a slower rate; only at C did prices first begin their 5-daydecline.
Momentum as a Percentage
Momentum, as most other calculations, can be expressed as a percentage rather than a rawvalue of its components. This is usually done by dividing the current value by the previousprice or index level, so that a 5-day momentum may be
P.-Pres P.-~ Pris
%M = ——— orPre Pies
 
FIGURE 6-1 Geometric representation of momentum.
 
    
PRICE INCREASE
ELAPSED DAYSa128 MOMENTUM AND OSCILLATORS.eR—_——FIGURE 6-2, Momentum range.
 
Maximum 5-Day Upward Move
Maximum
Distance =14-10 days —___>10 days Limit Move x $
     
Maximum——_ —— 35 days —-___-____— Distance =Limit Move x 5
Maximum 3-Day Downward Move /
The difference in the two approaches is limited by the percentage change in the underly-ing price over the 4-day period between ¢ — 1 and ¢ — 5. It is not likely that the change willeven be noticeable on a chart of %M, and it is best to standardize the approach to takingpercentages using ¢ - 1.
 
Price and Trend Difference
It is common for the term momentum to refer to the difference between today’s price anda corresponding moving average value. The properties of this new value remain the same.As the momentum becomes larger, prices are moving away from the moving average at afaster rate. When it gets smaller, the prices are converging with the moving average. Unlikethe first definition of momentum, a value that is positive but converging toward the mov-ing average may actually represent declining prices rather than prices that are advancing ata slower rate. The major similarity is that the peak of the price move is near the extremepoints of the momentum chart.
Figure 6-34 (upper panel) shows 10-period and 40-period moving averages plotted ona 15-minute German bund chart. Figure 6-36 (center panel) shows the difference betweenthe price and the 40-period moving average; the momentum value is fairly uniform, vary-ing by about .50 above and below zero. Because the moving average tends to catch up toprices over time, the maximum variation of the momentum measured this way is not asextreme as when momentum is calculated.as the difference between two prices. Thismomentum calculation has also been called relative strength, because it is measured rela-tive to a moving average.
Moving Average Convergence/Divergence (MACD) oe
Momentum may also be seen as the difference between two moving averages, a techniquedeveloped by Gerald Appel and named the Moving Average Convergence/Divergence(MACD)." In its original form, the two trendlines were produced using exponentialsmoothing, and their difference resulted in the MACD value. This was further smoothed togive a signal line. The most common presentation of MACD uses the difference between a12-day and 26-day exponential smoothing. The signal line, used to produce trading rec-
‘From John D. Becker, “Value of oscillators in determining price action,” Futures (May 1994),MOMENTUM 129————saFIGURE 6-3 Momentum as relative strength, the difference between prices and a movingaverage, or between two moving averages (MACD). (a, top panel) 10-day and 40-day movingaverages plotted with 15-minute German bund prices. (b, center panel) Momentum as the dif-ference between prices and the 40-day moving average. (c, bottom panel) MACD as the differ-ence between the 10-day and 40-day moving average values.
 
rine wes(a) M0896 Cm102.38 +48 On102.18 HelO2.46 L=16218 Mav-Avg 2ines -102.35- 102.34. ~ - - £9810
 
 
97,70
 
‘97 50
97.30
()
 
050TM va Ponce we” oes fh 0.00
(c) RMACD-PJk 0.00830.1500
yp FooT, oT, Tr “c wT
OT ens ane a7 5720 sit 2)
Br ft gy nt
 
 
 
Source: Chart created with TradeStation® by Omega Research, Inc.
ommendations, is a 9-day smoothing of today’s MACD subtracted from today’s MACD. Inprogramming code, the function @SmoothedAverage refers to an exponential smoothing:
MACD = @SmoothedAverage(close,12) - @SmoothedAverage(close,26)signal_line = MACD ~ @SmoothedAverage(MACO ,9)
The basic rules for trading the MACD would enter trend positions by referring only tothe signal line calculation. Buy when the signal line moves above zero, and se// when thesignal line falls below zero. Many traders, however, prefer to use the combination of MACDand signal line for signals, buying when the signal line crosses above the MACD line and sell-ing when it crosses‘below. The signal line could be used to produce countertrend signals,as is common when using the stochastic (discussed in the section “Oscillators” in this chap-ter), by selling when the MACD crosses the signal line heading down while still above zero.
Because both moving averages are lagged, the peaks identified by the differencebetween the two will also be lagged. This is contrary to the usual purpose of the momen-tum indicator, which is to identify the precise time when an extreme has been reached.Looking at Figure 6-3c (bottom panel), the difference between the 10-day and 40-day mov-ing averages is shown as a histogram, a form most commonly used for the MACD. It can beseen that the peak formed by the widest difference between the two moving averages isgenerally a few bars to the right of the peak seen on the price chart and the simple momen-tum line in Figure 6-36. -
An advantage of using MACD, as shown in Figure 6-3, is that the pattern is very smoothcompared with both prices and the single momentum line, and the trend of the MACD pat-tern is often a leading indicator of price change. The peak prices that occur on both May130 MOMENTUM AND OSCILLATORS
 
15th and May 20th are followed by a sideways price pattern over the remaining part of theday; however, the MACD declines smoothly, indicating price weakness. It would be difficultto use the momentum calculation in Figure 6-3b, because it still contains much of theerratic price movements.
Timing an Entry
Momentum is a convenient way of identifying a good entry point caused by a price rever-sal during a trend. By choosing a much shorter time period for the momentum calculation,for example 6 days, to work in conjunction with a longer trend of 30 to 50 days, themomentum indicator will show frequent opportunities within the trend. The short timeperiod for the momentum calculation assures you that there will be an entry opportunitywithin about 3 days of the entry signal; therefore, it becomes a practical timing tool.
Momentum as a Trend Indicator
The momentum value is a smoothing of price changes and can be very similar to a standardmoving average. Most applications use momentum as a substitute for a price trend. Bylooking at the net increase in prices over the number of days designated by an n-daymomentum indicator, intermediate fluctuations are ignored, and the pattern in price trendcan be seen. The longer the span between the observed points, the smoother the results.This is equivalent to faster and slower moving averages.
To use momentum as a trend indicator, the momentum span is selected and plotted asin Figure 6-4. A buy signal occurs whenever the value of the momentum turns from nega-tive to positive, and a sell signal is when the opposite occurs. If a band is used to establisha neutral position or a commitment zone, as discussed in Chapter 5, it should be drawnaround the horizontal line representing the midpoint momentum value, usually zero. _
Buy and sell signals that occur sooner and are likely to be stopped out more often, usea signal line created by smoothing the momentum values, in this case using a simple 3-daymoving average. Once the momentum value moves above a threshold level of, for example,70, a sell occurs when the momentum crosses below the signal line. The position may bestopped out when the momentum crosses above the signal line, or when momentummoves above its entry level. -
To find the best choice of a momentum span, a sampling of different values could betested for optimum performance, or a chart could be examined for some natural pricecycle. Identify the significant tops and bottoms of any bar chart, and average the numberof days between these cycles, or find the number of days that would closely approximate
 
FIGURE 6-4 Price momentum signals with and without a signai line.
 
     
t
Prices IncreasingMore Rapidly
Prices Increasingala SlowerRate
- Prices Decreasing a
_ ata SlowerRate
Prices Unchanged
Prices DecreasingMore Rapidly
{MOMENTUM 131
 
the occurrences of these peaks and valleys. These natural cycles will often be the bestchoice of a momentum calculation interval (Figure 6-5@).
Momentum and oscillators, however, are used just as often to identify abnormal pricemovements and for timing of entries and exits in conjunction with a longer-term trend.
Identifying Extremes
An equally popular and more interesting interpretation of the momentum chart is basedon an analysis of tops and bottoms. All momentum values are bounded in both directionsby the maximum move possible during the time interval represented by the span of themomentum. The conditions at the points of high positive and negative momentum arecalled overbought and oversold, respectively. A market is overbought when it can nolonger sustain the strength of the current trend and a downward price reaction is immi-nent; an oversold market is ready for an upward move. Faster momentum calculations willreach thesé maximum values more often and stay there for extended periods of highupward or downward momentum. The use of a slow momentum period, however, willproduce values that rarely test its limits. If the momentum system uses the horizontal zeroline to enter and exit trades, it is of no consequence how often the bounds are touched;once a position is entered, the high-momentum condition serves as a positive reinforce-ment for the trade. However, the maximum positive, and negative momentum values canbe measured and used to anticipate the end of a trend. For this purpose, momentum val-ues that are too fast will obscure the trading signals—the momentum index must beallowed to reach its full value.
A system that takes advantage of the momentum extremes may be created by drawingtwo horizontal lines on the momentum graph (Figure 6-56), above and below the zero line
 
FIGURE 6-5 Relationship of momentum to prices. (a) Tops and bottoms determine momen-tum value. (b) Corresponding momentum.
 
Set ee bei t 3
i
 
(a) ~_
 
Corresponding Momentum
(6)132 MOMENTUM AND OSCILLATORS
 
in such a way that the tops and bottoms of the major moves are isolated. These lines maybe selected visually so that once the line is penetrated, prices reverse shortly afterward.Another selection might simply be based on a percentage of the maximum possiblemomentum value. A third statistical approach would be to use a multiple of the standarddeviation, or some other probability distribution function, so that the band is formed bythe zero line plus or minus two standard deviations. That is, about 95% of all values withinthe area are bounded by the two horizontal lines.
When positioning these bands, there is always a trade-off between finding more trad-ing opportunities and entering the market too soon. This can be a complicated choice andis discussed in Chapter 22 (“System Trade-Offs”). Once these lines have been drawn, thebasic trading rules will be one of the following:
1. Aggressive. Enter a new long position when the momentum value penetrates thelower bound; enter a new short position when the value penetrates the upperbound.
2. Minor confirmation. Enter a new short position on the first day the momentumvalue turns down after penetrating the upper bound (the opposite for longs).
3. Major confirmation. Enter a new short position when the momentum value pene-trates the upper bound coming down (the opposite for longs).
4. Timing. Enter a new short position after the momentum value has remained abovethe upper bound for ¢ days (the opposite for longs).
To close out a profitable position there are the following alternatives:
1. Close out long positions or cover short positions when the momentum value satis-fies the entry condition for a reverse position.
2. Cover a short position when the momentum penetrates the zero line minus onestandard deviation, or some target point (e.g., halfway between the zero line andthe lower bound).
3. Cover a short position if the momentum recrosses the zero line, moving up afterpenetrating that line moving down..
A protective stop-loss order may be used to prevent giving up all profits (as in the lastpoint) or to protect the trader from a sustained move that causes the momentum value toremain on the outside of the overbought/oversold lines. ‘
1. Place a protective stop above or below the most extreme high or low momentumvalue.
2. Follow a profitable move with a nonretreating stop based on fixed points of a per-centage.
3. Establish zones that act as levels of attainment (using horizontal lines of equal spac-
~ ing), and do not permit reyerse penetrations once entered.
These precautions are due to both normal price variability and volatility. As pricesreach higher levels, increased Volatility will cause momentum tops and bottoms to widen;at lower levels, they may not be active enough to penetrate the bounds. A penetration levelestablished when coffee prices were 50¢ per pound arid the maximum daily range was 2¢would not work with coffee at $2.50 per pound and limits of 4¢. A reasonable modificationto the momentum plot would be the use of a band or stop-loss, which is a percentage ofprice, or a percentage of the permissible limit move (a volatility function). The tops andbottoms would remain more in-line although the risk would increase appreciably. This,however, is the intention of the oscillator.
When selecting trading rules for a countertrend technique, risk must be the primary.concern. Using entry option 1, a short signal will occur upon penetration of the upperlevel; this may happen when the market is very strong. If an immediate reversal does notOSCILLATORS - 133
 
occur, large open losses may accrue. One solution might be to place a fixed stop-loss at thetime of each entry. To determine the proper stop-loss amount, a computer test was per-formed using an immediate entry based on penetration of an extreme boundary, with aclose stop-loss for risk protection. The first results were thought to have outstanding prof-its and consistency until it was discovered that the computer had done exactly the oppo-site of what was intended: It bought when the momentum crossed the upper bound andplaced a close stop-loss be/ow the entry. It did prove, for a good sampling of commodities,that high-momentum periods continued for enough time to capture small but consistentprofits. It also showed that entry rule 1, anticipating an early reversal, would be a losingstrategy. One should never forget that declining momentum does not mean that prices arefalling.
OSCILLATORS
Because the representation of the momentum index is that of a line fluctuating above andbelow a zero value, this technique has often been termed an oscillator. Even though itdoes oscillate, the use of that word is confusing. In this presentation, the term oscillatorwill be restricted to a specific form of niomentum, or rate-of-change indicator, which isnormalized and expressed in terms of values that are limited to the ranges between +1 and—1, +1 and 0, or 100 and 0, as in percent.
To transform a standard momentum calculation into the normalized form (maximumyalue of +1, minimum value of --1), divide the momentum calculation by the maximumattainable value of the momentum index. A 5-day index for silver with a 20-limit movecould be divided by $1.00 to find the normalized value. If silver were to move its limit upfor 5 days, the oscillator would have the value of +1 rather than the momentum value of100. If the Limits were to expand, the divisor would change as well, giving the technique ameans of adjusting for varying volatility. Using the normalized momentum, or oscillator,the top and bottom zones become volatility-adjusted at any level.
Erratic movements in the simple momentum and oscillator make it a very difficult toolto apply without additional work. Some of these problems can be eliminated by makingthe buying and selling zones more extreme or by smoothing the indicator values. In thefollowing sections, a few of the applications of this technique are shown.
Relative Strength Index
One of the most popular indicators for denoting overbought and oversold conditions isthe Relative Strength Index (RS!) developed by Wilder.” It provides added value to themomentum indicator by scaling all values between 0 and 100. It is more stable thanmomentum because it uses all the values in the period rather than just the first and last. Itis a simple measurement that expresses the relative strength of the current price move-ment as increasing from 0 to 100. It is calculated as
rst = 100 - (08 ) = 100 x(
 
 
RS+ RS 1+RS
AU .he RS = ——where
AU = the total of those days closing higher during the past 14 daysAD = the total of those days closing lower during the past 14 days
Ofice the first calculation has been made, both the AU and AD values can bé calculateddaily using an average-off method:
2), Welles Wilder, Jr, New Concepts in Technical Trading Systems (Trend Research, Greensboro, NC, 1978).134 MOMENTUM AND OSCILLATORS
 
AU pxAU aay = AU prior ~ va + today’s up close or 0
 
AD woday = AD prior — ee + today’s down close or 0This method essentially drops an average value and adds the new value, if any. The dailycalculation of the RSI becomes simple.
Wilder has favored the use of the 14-day measurement because it represents one-halfof a natural cycle. He has set the significant levels for the RSI at 30 and 70. The lower levelis indicative of an imminent upturn and the upper level of a pending downturn. A plot ofthe RSI can be interpreted in the same manner as a bar chart, with the head-and-shouldersformation as the primary confirmation of a change in direction (Figure 6-6).
In fact, Wilder relies heavily on top and bottom formations for RSI signals, More oftenthan head and shoulders, the failure swing or divergence denotes an unsuccessful test ofa recent high or low RSI value.
Modifying the RSI
An obvious objection to the RSI might be the selection of a 14-day balf-cycle. Maximumdivergence is achieved by the use of a moving average that is exactly one-half the length ofthe dominant cycle, but 14 days may not be that half cycle. In addition, common-use chartinterpretation might mean that the RSI value remains outside the 70-30 zones for"extended periods rather than signaling an immediate turn.
In practical terms, a 14-day criterion means that a sustained move in one direction thatexceeds 14 days will retain a very high RSI value and may result in losses if a short positionwas entered. If the trading of the RSI seems to have high risk, increase the overbought and .oversold levels by moving them from 70-30 to 80-20. This will cause a signal to be givenat a more extreme level.
The generalized program code for an’n-day RSI is given assumup = 0;sumdn = 0; -for j = 1 to n begin ‘
if close - close[i] > 0 then .
sumup = sumup + close - close[l]else sumdn = sumdn + close[1] - close;end;RSI = 100 - (100 / (1 + (sumup/sumdn)));
 
a
FIGURE 6-6 RSI top formation.
 
High above 70
        
Second high fails
       
70Sell at break point ~60Bottom of first50 reaction is neckline
and sell paintOSCILLATORS 135
 
A study by Aan? on the distribution of the RSI showed that the average value of an RSItop and bottom was consistently grouped near 72 and 32, respectively. Therefore, 50% ofall RSI values lie between 72 and 32, which is evenly distributed and similar in proportionto a standard deviation. This would suggest that the 70-30 levels proposed by Wilder aretoo close together to act as selective overbought/oversold values, but should be moved far-ther apart.
The frequency at which the market will reach these extreme levels can be adjusted bychanging the 14-day criteria. If the interval is shortened, the RSI will reach extremes moreoften and trades will have higher risk. If the time period is increased, there will be safer butfewer trades based on RSI extremes (discussed in more detail in Chapter 22). It is alwayssafer to err on the side of less risk. If there are too many trades being generated by the RSI,a combination of a longer interval and higher confidence bands will be an improvement.
Further Smaothing with N-Day Ups and Downs
Instead of increasing the number of days in the RSI calculation period, a smoother indica-tor can be found by increasing the period over which each of the up and down values aredetermined. The original RSI method uses 14 individual days, where an up day is a day inwhich the price change was positive. Instead, we can replace each 1-day change with a2-day change, or an n-day change. If we use 2-day changes, then a total of 28 days will beneeded, so that each 2-day period does not overlap another, there will be 14 sets of 2 days.Using 14 sets of 2 will give a smoother indicator than using 28 single day changes.
Net Momentum Oscillator
Another variation on the RSI is the use of the difference berween the sum of the up daysand the sum of the down days, called a net momentum oscillator. If you consider theunsmoothed RSI = 100 x (S,/(Su + Sa), then the net momentum oscillator would be CMO =100 x (S, — Sa)/(Su + Sg). This method replaces some of the indicator movement lost tosmoothing in the normal RSI and shows more extremes. This may also be done by short-ening the number of periods in the RSI calculation.
Stochastics -
The stochastic, created by George Lane, is an oscillator that measures the relative positionof the closing price within a past high-low range. It is based on the commonly acceptedobservation that closing prices tend to resist penetrating the day’s high prices as anupward move gains strength; similarly, closing prices often remain above the lows duringa decline. When the market is about to turn from up to down, for instance, it is often thecase that the highs are higher, but the closing price settles within the previous range. Thismakes the stochastic oscillator different from most oscillators, which are normalized rep-_resentations of the relative strength, the difference between the closing price and aselected trend speed.
The three indicators that result from the stochastic measurement are called %K, %D,and %D-slow. The first two calculations form the normal concept of the stochastic oscilla~tor and are calculated for today ¢ as
G-L,6)
Initial %K, = 100 xuae R, (5)
> Peter W. Aan, “How RSI Behaves,” Futures (January 1985). -
‘For a more sophisticated approach to RSI optimization, see John F. Ehlers, “Optimizing RSI with Cycles,” Jech-nical Analysis of Stocks & Commodities (February 1986).
5 Tushar S. Chande and Stanley Kroll, The New Technical Trader Qohn Wiley & Sons, New York, 1994).136 MOMENTUM AND OSCILLATORS.
 
- ( s xx;)SD = “%Keslow" = Rit Kin + Kina _ era
(3-9)3
where C, is today’s closing priceL,(5) is the low price of the last 5 daysR,(5) is the range of the last 5 days (highest high minus lowest low) as of today.
3 3
%D,-slow =
Notice that %D is a 3-day moving average of %K, and %D-slow is a 3-day moving aver-age of %D. The 5-day high, low, and range selections tend to make the smoothed stochas-tics, %D and %D-slow, front-loaded calculations. Figure 6-7 shows the price of July 1984cotton plotted with the corresponding %D-slow and %D (%K-slow) stochastic. Notice thatthe extremes do not correspond to what would be expected using a 5-day simple momen-tum. Points A and B appear much weaker in the stochastic than on the line chart, whilepoints C and D are more pronounced. The low at point £ is confusing, perhaps due to thegap in data; otherwise, the stochastic would seem a unique and useful tool. The smoothedvalue %D-slow does not lag as much as the 3-day average would imply, supporting thepremise that there is significant weighting given to the more recent prices. The first calcu-lation, %K, is not used due to its instability.”
Interpreting the Stochastic
The initial trading signal occurs when the %D-slow crosses the extreme bands, suggestedin the range of 75 to 85 on the upside, and 15 to 25 on the downside. The order, however,is not placed until the %K-slow line crosses the %D-slow line (considered the signal line).Even though the extreme zone helps assure an adverse reaction of minimum size, thecrossing of the two lines acts in a way similar to a dual moving average system. By waitingfor the crossover, the trader cannot be trapped into shorting an extremely bullish move orbuying a bearish one. -
The emphasis in interpretation of the stochastic is its divergence from the apparentdirection of prices. Referring again to Figure 6-7, points A and B are declining while newhigh prices at A are tested at B. This divergence is an important confirmation of the sellindication.
Patterns noted by Lane® are more extensive than other writings. They include:
Left and Right Crossovers
Typically, the faster %K-slow will change direction sooner than the %D-slow, crossing the%D-slow line while it is still moving in the prior trend direction. The opposite case, whenthe %D-slow turns first, indicates a slow, stable change of direction and is a more favorablePattern (Figure 6-82). _
’
* Harry Schirding, “Stochastic Oscillator,” Technical Analysis of Stocks & Commodities (May/June 1984). For apocket computer version of these calculations, see C.E Johnson, “Stochastic Oscillator Program for the HP-41C(V),” Technical Analysis of Stocks & Commodities (September/October 1984).
7 It is common practice to use the notation %K and %D to mean %K-slow and %D-slow, respectively. All writingsor the stochastic use the smoothed values, rather than the initial %K calculation, regardless of the omission of“slow.” Any use of %K in this text will also refer to %K-slow, unless specifically stated.
® George C. Lane, “Lane's Stochastics,” Technical Analysis of Stocks & Commodities (May/June 1984).OSCILLATORS 137
 
—_——————— eeFIGURE 6-7 The stochastic. A 5-minute bar chart of July 1984 cotton futures (New YorkCotton Exchange) as recorded by a Commodity Quote-Graphics TQ-20/20 satellite system.Cotton's 5-period stochastic is plotted below the bar chart.
A B c Dp E
 
 
Hinge
A reduction in the speed of either the %K-slow or %D-slow lines, shown as a flattening out,indicates a reversal on the next day (Figure 6-80).
Warning
An extreme turn in the faster %K-slow (2 to 12%) indicates at most 2 days remaining in theold trend.
Extremes ~
Reaching the extreme %K-slow values of 0 and 100 requires 7 consecutive days of closes atthe highs (lows). The test of this extreme, following a pullback, is an excellent entry point.Setup -
Although the line chart shows higher highs and lows, if the %D-slow line has lower lows, abear market setup has occurred. Look for a selling opportunity on the next rally (Figure6-8c).
Failure
An excellent confirmation of a-change in direction occurs when %K-slow crosses %D-slow(after penetrating the extreme level) then pulls back to the %D-slow line, but fails to crossit again (Figure 6-8¢).138 MOMENT