KEY
TAKEAWAYS
- Absolute momentum defines trend direction.
- Relative momentum quantifies the strength of the uptrend.
- Take together, these two form the basis for a Dual Momentum Rotation Strategy.
As the name suggests, Dual Momentum Rotation Strategies focus on stocks that are in absolute and relative uptrends. This is a two-step process. First, filter out stocks that are in long-term downtrends and only focus on stocks in uptrend. Second, rank the stocks by a performance indicator and focus on the strongest. Note that TrendInvestorPro runs two Dual Momentum Rotation Strategies.
Traditional trend-following indicators, such as the 200-day SMA, measure absolute momentum. For example, a stock is in a long-term uptrend when above its 200-day SMA. Stocks trading below their 200-day SMAs are in long-term downtrends and do not make the cut for the second step.
For stocks in long-term uptrends, chartists can then quantify performance using the 200-day Rate-of-Change and comparing values to find the strongest. A stock with a 49% Rate-of-Change is stronger than a stock with a 19% Rate-of-Change.
The image below shows CandleGlance charts for the top Nasdaq 100 stocks. They are ranked by the 200-day Rate-of-Change (ROC(200)). “Add indicator” is Rate-of-Change 200 and “Sort by Indicator” is Descending (red outline). These 12 are also above their 200-day SMAs (red lines) and in long-term uptrends.
As the green ovals show, Nvidia (NVDA), Crowdstrike (CRWD) and Constellation (CEG) are up over 100% the last 200 days and the other nine are up 50% or more. Chartists running a Dual Momentum Rotation Strategy would be focused on these leading names when constructing a portfolio. Strength begets strength.
We use a similar process for our Dual Momentum Rotation Strategies at TrendInvestorPro. Instead of raw Rate-of-Change, we use a volatility-adjust version to level the playing field. NVDA, CRWD and CEG are part of the current portfolio for the Nasdaq 100 strategy. We also have a separate strategy for S&P 500 stocks. Both strategies are off to a great start this year and you can view full performance metrics here.
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Choose a Strategy, Develop a Plan and Follow a Process
Arthur Hill, CMT
Chief Technical Strategist, TrendInvestorPro.com
Author, Define the Trend and Trade the Trend
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Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.
