Stock Price Momentum
Momentum is good while it's moving in the direction of the trend that you want to capitalize on. If you are long on stocks (meaning you want to buy them first then sell them when the price is higher) then you are looking at rising price momentum and want to capitalize on stocks with prices that will move higher after you buy them. But we all know, or learn soon, that momentum doesn't continue in the same direction forever ("trees don't grow to the sky"). At some point momentum will change.
What causes Momentum To Slow Or Even Reverse?
The answer is friction. A car rolling without engine power may have enough momentum to keep it rolling for a while after the engine stops. But it will come to a stop because of friction. The surface of the ground rubbing against the tread of the tires will slow and eventually stop the wheels from turning which will bring the car to a stop. If there is an incline such as the car was going up a hill when the engine stopped then when forward momentum stops then the car will start falling back down the hill when all of the momentum is exhausted.
Stock prices are like the car in the example above. Just like a car under engine power can overcome an uphill incline, so a stock's price can move higher even if the market is falling. The opposite is true too. When the market is risinig even a stock with a price that had forward momentum (rising prices) can run into friction and the price can begin to drop even while the market is rising.
What Kind Of Friction Slows Stock Price Forward Momentum?
The biggest source of friction for stock prices is bad news. News about the market in general can be bad, or it can even be bad news specific to one stock (hopefully not your stock). Bad news can put the breaks on forward stock price momentum and send it into reverse. Backward momentum can be shockingly worse than previous forward momentum. "Stock prices take the stairs up, but the elevator down" is a saying that is familiar to most trades because it is great picture for an absolute reality.
Bad earnings surprises, a competitor's better product offering, and key negative changes in leadership within the company are all things that cause friction for a stock's price and may cause it to slow or reverse downward. Some of these things can not be known ahead of time by the general public. That's why advanced analytics on key indicators are essential to have. There are analytics that can tell you how a stock compares with its peers, the direction and strength of its price momentum, where the ceiling (resistanct) and floor (support) is likely to be. Compiling and examining the analytics that reveals the foregoing information for a stock can be time consuming but is worth it.
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