The concept of momentum is based on Newton’s first law of motion – which states that an object in motion will continue to stay in motion unless acted upon by an external force.
Applied to the financial markets, this suggests that a stock on an upward or downward trend is likely to continue on that trajectory, until a significant external factor triggers a change.
In other words:
Momentum = Trend strength
Bullish momentum involves making investments in stocks showing an upward trend. Bearish momentum, on other hand, is all about selling stocks that have fallen steadily.
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One of the main benefits of momentum trading is that it can generate high returns in a short period of time, especially in volatile markets.
Obviously there’s a bit of risk involved, because in essence, you’re making a decision to buy or sell a stock based on recent buying or selling activities of other traders.
So to be a successful momentum trader, one needs to be able to identify the best stocks quickly and accurately.
The goal for momentum traders is basically to enter into trades at key points in the trend in order to maximise profits.
There are several indicators to quantify momentum, and here we look at three main signals used by the market:
52-week high Simple moving average (SMA) Relative strength index (RIS)
Traders often view the 52-week highs as entry signals.
This is due what’s called the “52-week high effect” – where if a price has broken out above its 52-week range, there must be some factor that generated enough momentum to further continue the price movement in the same direction.
On the other hand, if a stock is far away from its 52-week high, chartists believe the momentum will continue going that way.
Data from CommSec
CLEARVIEW WEALTH (ASX:CVW)
The life insurance company announced the sale of approximately 39.56 million shares in Centrepoint Alliance (ASX:CAF) to COG Financial Services (ASX:COG), at a share price of 33c each, representing total consideration of $13.05 million.
The sale shares represent approximately 19.9 per cent of Centrepoint’s current issued capital.
ClearView first acquired a 24.5 per cent holding in Centrepoint in November 2021, and has held the strategic investment since that date.
Given ClearView’s sole focus on life insurance, ClearView has determined to sell its strategic investment in Centrepoint.
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WOOMERA MINING (ASX:WML)
Woomera recently announced that it had received binding commitments for a placement of 233 million shares to professional and sophisticated investors at an issue price of $0.009 per share to raise $2.1 million.
The company will use the funds to complete a reverse circulation (RC) drilling program totalling about 3000m across its wholly owned Mt Cattlin project, and its Mt Short JV project with Anax Metals, which are both located in a proven lithium belt.
These projects are located 5km and 13km respectively north of Allkem’s Mt Cattlin Lithium mine. Landowner and statutory approvals are now in place for the two programs.
Simple moving averages
Simple moving averages (or SMA) is another indicator that can be used to gauge momentum.
SMA is often used to determine whether a stock price will continue in the same direction, or if it will reverse a bull or bear trend.
As a general rule, if the current stock price is above the SMA, the price trend is up. If the price is below the SMA, the trend is down.
Data from CommSec
BRIGHTSTAR RESOURCES (ASX:BTR)
Brightstar recently announced a Maiden JORC 2012 mineral resource estimate (MRE) at the Link Zone of +21koz @ 1.1g/t Au from shallow, near surface material at the Menzies Gold Project.
Brightstar has identified the Link Zone as having the potential for early-stage mining opportunities to generate operational working capital that could organically fund exploration and development activities.
The MRE displays favourable orebody characteristics of near surface stacked lodes, oxidised material, likely low strip mining, and is still open at depth and along strike at all three deposits within the Link Zone.
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ANDROMEDA METALS (ASX:ADN)
Andromeda also announced an inaugural MRE, for the Chairlift kaolin deposit in South Australia.
A combined Inferred Resource of 53.5 million tonnes (Mt) of kaolin comprised of 27 Mt of Bright White, low titanium kaolinised granite 26.5Mt of rheology modifier kaolin. The low titanium content of Chairlift CRM, with an average TiO2 of 0.18 per cent.
Low RSI (Oversold)
Here’s another momentum signal used by the market – the relative strength index (RSI).
RSI is a measure of the strength of a stock’s momentum, either in the upward or the downward direction, and is used to indicate whether a stock is oversold or undersold.
Generally speaking, an RSI above 70 means a stock is overbought and an RSI below 30 indicates that it’s oversold.
An RSI above 80 is strongly overbought, and an RSI below 20 is strongly oversold.
Data from CommSec
ASTUTE METALS (ASX:ASE)
Astute said it had secured a two-year extension of term (EoT) on its 100 per cent-owned East Kimberley Diamonds exploratio nlicence in Western Australia.
After securing the EoT, the company will now aim to finalise cultural heritage survey matters with the traditional owners.
In addition, Astute will also finalise a proposed “program of work” submission, for an exploration program scheduled to take place in Q2 2024.
RENEGADE EXPLORATION (ASX:RNX)
In late October, Renegade completed drilling at its Cloncurry Project, targeting the Mt Glorious copper-gold prospect which is previously undrilled, and yielded recent rock chip samples up to 17.8 per cent Cu and 14.35g/t Au.
Located just 7km west of the Mongoose copper-gold prospect, Mt Glorious is Renegade’s second target at the Cloncurry Project given significant outcropping copper-gold in the existing pits and immediate surrounding area.
This content first appeared on stockhead.com.au
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Originally published as Hot Money Monday: Newton’s first law and these three momentum signals offer opportunity