Introduction to Advanced Investment Indicators

In this post, I discuss two famous indicators: Master Momentum and RSI, that you can combine with the analysis from previous blog.

From our previous discussion on the importance of the 200-day average, it’s clear how pivotal new tops on the price or average can be. For a more nuanced view and optimal trading points, incorporating additional technical indicators proves invaluable.

RSI (Relative Strength Index)

The Relative Strength Index (RSI) is a widely recognized technical indicator that evaluates the magnitude of recent price changes to determine overbought or oversold conditions.
The value of the RSI fluctuates between 0 and 100. Typically, an RSI value above 70 suggests an overbought scenario, whereas below 30 indicates an oversold state.

Master Momentum (MMT)

Master Momentum, or MMT, enhances long-term investment strategies by measuring the differential between a security’s closing price and its average from a few days prior. A positive and increasing difference indicates strong upward momentum.

What is Master Momentum?

The MMT measures the difference between the closing price and its average a few days ago.

With a rising positive difference, you have positive momentum because the distance between the price and its average is increasing.

Since the daily price fluctuates, the MMT is subject to price fluctuations.

To observe the trend of MMT faster, it is convenient to also place an average on the MMT. If this average rises, then it is fine.  Thus, the Master Momentum shows the strength behind the stock.

• If the stock has an upward trend and the momentum is increasing, then the trend is intact.
• If the stock has an upward trend and the momentum slows down, then this is a first warning of a possible trend reversal.

Combining RSI with Master Momentum

Master momentum allows you to reinforce your long-term strategy.
By integrating the RSI with Master Momentum, investors can formulate a dynamic strategy. For instance, an RSI below 30 coupled with a rising MMT indicates a compelling buying opportunity for those focused on the long term.

Utilizing Averages and New Highs

Recall from our previous entry that securities trading above their 200-day average and achieving new highs are demonstrating market strength. When these conditions align with robust Master Momentum, they solidify a sound long-term investment stance.

Specifically

Master Momentum and RSI

Prefer stocks with rising Master Momentum where the RSI is below 70. This signals a strong uptrend that still has room to grow.

The 200-Day Average

Favor stocks trading above their 200-day average. This is a sign of the stock’s inherent strength.

Does the 200-day average simultaneously make a new top that is an additional strong signal.

New highs

Stocks that make new 52-week highs combined with strong Master Momentum put themselves on the map as market leaders with potential for further growth.

Steadiness

Long-term investing requires determination. Do not be distracted by short-term fluctuations. So it is best to stay true to your chosen strategy.

Practical Application in the Stock Market

This screenshot features a detailed analysis using TransStock software of Consolidated Water Company on the NASDAQ from 2020. It includes various horizontal zones with green arrows indicating upward trends and red arrows for downward trends, highlighting strategic trading points. You can see at the bottom in red the end of new bottoms at the 200-day average and at the top the start of new tops at the 200-day average. From April it is sitting well and therefore sufficient reason to analyze the stock with buy and sell indicators.

Analyzing Trend and Indicators

The chart above shows the entry and exit points.

1. Circle 1:
   After a nice rise in November 2022, you can see on the 3rd inside window an important trend reversal of the MMT. The MMT crosses its average down and then the MMT turns Negative.
   Investors who only look at the RSI are done for. The stock consolidates and the MMT remains below its mean.
2. Circle 2:
   In January 2023, the MMT again crosses its average upwards and a little later the MMT turns positive. During this phase, you place the stock on your favorites list.
   In this way, after some time you have several candidates with positive momentum but no powerful buy signal for the time being.
3. Circle 4:
   At the end of March you have the buy trigger: a dip in the RSI towards 30 followed by a rapid rise in the price. A crossing of the MMT with its mean.
   This succession of triggers signify the beginning of a new cycle after months of consolidation.
4. Circle 5:
   After a 70% rise, there is profit-taking on the stock in July 2023. The MMT crosses its mean down and the RSI drops below 60. This is a sell signal.
5. Circle 6:
   Finally, in August 2023, you again see a combination of buy signals:
   a) The RSI ticks near 30 and again a powerful price rise follows.
   b) The MMT crosses its average upward and finally the chart goes through its previous top. Prudent investors who buy in stages can take a 2nd position when this top is broken.

Conclusion

You first check the chart graphically: uptrend, 200-day average, new tops…
If you see an interesting phase, zoom in and use technical indicators.
By combining indicators with an upward trend and new highs, you outline a robust long-term strategy.
If you prefer to buy in phases, clearly define in your strategy the conditions that you buy and add on.

For example, buying in a downtrend is not recommended since you are increasing the allocation of a weak stock within your portfolio. With the above strategy, stocks in a downtrend are sold immediately and consistently.

In a stock market full of variables, this long-term ‘Up and Top’ strategy provides simplicity, clarity and success.

By combining these indicators with prevailing market trends, you create a robust strategy for long-term investment success. If buying in phases, ensure your strategy clearly defines the conditions for each phase.