Imagine the treadmill of an airport, the one that runs along the corridors separating one area from the other. The airport is the market. The area where you step on the treadmill is the starting point of a trend. The area where you get off the treadmill is the arrival point, from where another treadmill (another trend) begins. The Composite Momentum is the treadmill connecting these areas: combining the starting point of a trend to its arrival point. It helps you and shows you the way.
As it happens on the treadmill, if you try and walk on it in reverse you make a great effort and very little result. Moreover, as soon as you stop to rest, the treadmill takes you back where you started in no time. If you run along the direction of the treadmill, it seems to fly.
This is what happens to those who oppose the underlying momentum of a market (which is like running in the wrong direction: so much effort, little result and the treadmill does not change direction anyway) instead of supporting it. Those walking down the aisle in the right direction but on the floor instead of the treadmill are exactly like those who own static allocation versus those who change the allocation according to the trend. They will come too but it will take longer, they will be more tired and fatigued and if they don’t run they might miss the flight too.
The Composite Momentum helps to understand three things:
- When to step on the treadmill
- Which is the direction you have to take
- Where you might want to go down or prepare for descent
In particular, the application of this indicator on a long term basis (ie annual and quarterly charts) provides important informations about the basic direction of the market. On a monthly basis, it provides investors with the timing of entry and exit. On a weekly basis, it generates “fine tuning” signals for timing the operations of money managers and traders .
The goal of the Composite Momentum is to help identify the underlying trend of the momentum of the market, the turning points, the excess situations and potentially profitable circumstances.