Dr. Brett is always writing interesting stuff – this caught my eye today – Demand and Supply: Measures of Stock Market Momentum. In the article, he outlines a method for measuring market momentum by counting the number of stocks breaking over a Bollingerband and below it:
Significant momentum is defined by a stock’s closing above or below its Bollinger Band; i.e., above or below the volatility envelope surrounding its short-term moving average. The larger the number, the greater the number of NYSE, NASDAQ, and ASE stocks that are trading with significant momentum.
Well that’s right up my alley. So I used the S&P 500 for my tests. And to make it more interesting, I compared it against another momentum indicator I look at – the number of stocks making RSI2 > 90 or RSI2 < 10. First, it’s interesting that the two are close. But what is also interesting is that there may be more subtly in the BB approach – for instance, during the most recent sell-off, notice how the line starts to fall off as the index trends down – perhaps indicating that the trend is weakening.
Here’s a graphic: