Above is a plot of an interesting mensurate that tracks the divergence betwixt brusque term as well as intermediate term novel highs minus novel lows for SPX stocks only. (Raw information from Momentum Curve, which is the human relationship betwixt forcefulness as well as weakness across multiple fourth dimension frames.
Since the offset of 2014, when the high-low divergence has been inward its well-nigh positive quartile, the adjacent 5 days inward SPX accept averaged a make of +.33%. When the high-low divergence has been inward its well-nigh negative quartile, the adjacent 5 days inward SPX accept averaged a make of +.47%. Across the 2 middle quartiles, when the momentum crimp is neither positively or negatively skewed, the adjacent five-day alter inward SPX has been essentially flat.
What the momentum crimp captures are short-term momentum as well as value effects inward the equity index. These, inward turn, reverberate the dynamics of intermediate-term cycles inward markets as well as the interplay of volatility, correlation, as well as directional toll movement. Knowing where you’re at inward a marketplace position bike is quite valuable inward harvesting momentum (price continuation) as well as value (price reversal) effects inward the market. Essentially all of the marketplace position gains over the by twelvemonth as well as a one-half tin last attributed to momentum as well as value factors.
Further Reading: The Psychology of Quantitative Analysis