TSC Technical Forum
Momentum Buying Has Its Advantages
 By Gary B. Smith
RealMoney.com Contributor

8/4/2004 8:50 AM EDT
URL: http://www.thestreet.com/p/rmoney/techforumrm/10176214.html
 Technical Analysis NEUTRAL
  • Today's charts include the Dow, Qwest, Oregon Steel, Nanometrics and KVH Industries.
  • The Dow's pullback is 'normal and necessary.'
  • Conclusion: Buying momentum has a slight edge vs. buying declines.
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    Over on Street Insight, Doug Kass has often opined the market has no memory from day to day. Perhaps, but is the same true for individual stocks? Because if it is, buying a stock that is down from the previous day should yield roughly the same return as buying a stock that is up from the previous day.

    Easy enough to test, and I did just that with the following parameters:

    "Buying a stock that is up" test:

  • Test dates: Jan. 6, 1984, to present

  • Data: Stocks in the S&P 500

  • Equity size per trade: 10% of assets

  • Entry: If the current day's close is higher than the previous day's close, enter at the close. (This is fudging things a bit, as we really don't know if we should enter until it's too late. But we're testing a hypothesis, not specifically trading.)

  • Exit: At the close of the following day.

    • For the "Buying a stock that is down" test, I used the same parameters as above only enter if the current day's close is lower than the previous close.

    The results?

    "Stock up" test: 97,008 trades with a yearly compounded rate of return of 54.90%.

    "Stock down" test: 97,443 trades with a yearly compounded rate of return of 35.38%.

    Breaking this down further, the win rate and average win were nearly identical in both tests. The difference: The average loss for the "stock down" case was just a bit more (-1.54% vs -1.48%), and over 97,000 trades, enough to swing the results in favor of the stock up approach.

    Conclusion: Slight edge to momentum buyers!

    Charts n' Things

    Today, the Dow Jones Industrial Average, Oregon Steel Mills (OS:NYSE) , Cumulus Media (CMLS:Nasdaq) , Nanometrics (NANO:Nasdaq) , KVH Industries (KVHI:Nasdaq) , and Qwest Communications (Q:NYSE) .

    Charts produced by TC2000, which is a registered trademark of Worden Brothers Inc.

    And that is the final word from Athens, Ga., where, is it me or is the upcoming Olympics generating very little in the buzz department?
    Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes a daily technical analysis column for RealMoney.com and also produces a daily premium product for TheStreet.com called The Chartman's Top Stocks -- click here for a free two-week trial. While Gary cannot provide investment advice or recommendations, he invites you to send your feedback to gsmith@thestreet.com.