A Further Look at Short-Term Stock Market Momentum

I recently took an initial look at stock momentum, finding that markets that finish the day strong (weak) tend to trade above (below) their day's high (low) the following session.

Here is another look at short-term momentum, drawing upon the Demand/Supply indicator mentioned in my previous post.

Going back to late 2002, when I first began collecting those data, if two conditions are met:

1) The most recent day has positive momentum (Demand exceeds Supply);

2) The most recent day has stronger momentum than the prior day (Today's Demand greater than yesterday's),

then we trade above the previous day's high in SPY approximately 60% of the time (vs 48% for all remaining days).

Adding a strength filter such as advance/decline strength improves these odds further. Interestingly, we don't see an edge on taking out yesterday's low when downside momentum is strong.

More on this topic to come; eventually, I'll be adding a Momentum System for swing trading to the Transition System. Signals from both systems will appear on the blog and in Twitter updates (follow here) as a way to provide decision support for discretionary traders.
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