Momentum Investing

Momentum investing, a strategy that capitalizes on the tendency of stocks to continue their price movement in the same direction, has been a subject of fascination for investors for decades. This article delves into a specific momentum-based strategy: identifying stocks that have breached their Weekly timeframe’s R4 resistance level of camarilla pivot in the current year and concurrently touched new all-time highs. The hypothesis is that these stocks exhibit a higher probability of continued upward momentum, offering substantial returns when coupled with appropriate position sizing, expectations around profit targets, sufficient hold time and diversification. In hindsight the gains for holding on to these investments seem to give extreme returns in short period of time.

A camarilla pivot’s R4 level is the last line of defence. A successful closing of price in weekly timeframe, above R4 and consolidating above R4 levels technically means that stock price wants to migrate to higher value area in coming year.

This is kind of a technical screen helping you to focus on few sets of stocks from infinite universe. What this screen does is, it says that these stocks might not be bad in terms of offering good return performance for the rest of the year. It is not saying that the stocks are good.

Typical screen would look like as below. Note that I have selected some random stock in this example. It has crossed multiyear high and also crossed Weekly R4 resistance.

Figure 1: Random Stock Crossing All Time High and above Weekly R4 resistance

Once the list of stocks is available, you can do a second level screen of fundamentals around quality of earnings, stories around the stock, sectors and various other methods to filter out more of them. This will lead you to things that fit to your personal liking and easy to understand stocks or assets for you.

Humans have a problem of needing a conviction in language of their understanding (English, Hindi, Marathi, German, French, Spanish, etc.) to put up a position size in the stock or asset they buy. They simply cannot understand numbers and data. It is very important to get conviction in Human language of understanding. This is the key to getting the Hold Time required to make it big in momentum investing. The stocks or assets are going to go up very rapidly and sometimes beyond your wildest imaginations. To achieve hold time, you need to cling on to your holdings as a human and at same time when technical stop occurs you must exit it with zero emotion involved. When these selections are going up, they will go up 2x in a month and then fall down 30% (due to sudden overall market condition changes) and then again go up 3 times or 10 times depending on the degree to which they were undervalued. The best part is you get to jump in just nice. Then you have to see fast returns. Then a sharp fall to a go nowhere zone and then again, a sharp rise. The go nowhere zone and sharp fall are a trouble to human life. So, during these times you recite in your language your things which lead you to strong conviction to hold on. Do note that you are still in profits when you are seeing the sharp falls and go nowhere zones. The stop loss will help you clear off the holdings and save you, just in case market trend reverses permanently. This is the time to put your conviction in nearest garbage can and move on to build a new one.

Once you have the list of stocks the big difficulty now, is finding an entry. All of us have only 100$. So now we will invest 50$ equal weight into the list, accepting the risk that market can reverse anytime/ it may not. A best entry for a stock or an asset would be a point in space and time from where you will have least probability of return to that point again in the upcoming future until your profit targets or substantial multi-bagger gains are achieved.

This is very tedious and worth your effort task to find the best buy point. You can use broad market monitoring systems, see what is most popular trading culture in the market, etc. to find out your best buy point. Many times, the mean reversion days (the fall days) in these momentum stocks give you best buy points. Getting to best buy point is a trade off between full capital deployment and achieving higher R multiple, Gain to Pain ratio on your investment.

Once this price point is identified, I place a buy order very nearby to this point around 1% to 3% max, with a 2% position size allocation of net investable capital. This shall help in very reduced losses and higher gains in time due to the nature of the underlying asset.

If I get too convinced around the asset, and I have more capital to be deployed, I put on 7% max investable capital size to this allocation. Not going full size of investable capital is the key to survival. The logic is that, there shall be many opportunities coming in and we can understand a few and keep investing small amounts, and in time we shall grow big and not all of a sudden. The market has a nature of moving up and down every now and then with extreme volatility. Sometimes it just stops moving up! So, a good cash on hands also saves the day!

Once we have positioned into the stock, now we wait for few months to week for it to reach the estimated profit target. Sometimes it doubles from the max high level of past 10 years and sometimes it goes 10x from that level. It all depends on how it is valued compared to earnings/ potential earnings it is going to produce in upcoming future.

In momentum investing once the job of buying is done right you just don’t have anything to do for months or sometimes years, unless you get more capital to deploy.

Some ideas around finding the Stop loss point:

Below is some stock whose weekly timeframe R4 was at 1053.8. On 25 July 2022 a day candle closed successfully above this R4 level. After that, there was a consolidation and eventually on 29 July 2022 there was again a breakout above the high of the candle that broke the R4 level in weekly basis. This I think should be the best point to consider your entries, keeping stop at Weekly R4 level.

Figure 2: Breakout Entry Method and deciding Stop Loss

Entry at 1090 levels and stop loss at 1053 level should give a good R multiple for this investment.

This is what has happened in past two years in this stock.

Figure 3: How the Stock Evolved in Past

Above stop loss I have given for entering just after the breakout. Stocks give ample amount of time to study and do required analysis and give bracket structures (the consolidation zones) to make appropriate entries. There is no hurry to enter here. I enter when I think I am getting the best R multiple.

Now I take a random stock from Global markets to test the theory.

Figure 4: Random Stock listed in Global Markets

n above stock there was a consolidation above R4 levels and then there was breaking of R5 levels followed by a very small consolidation and then a sharp move in few weeks to achieve the higher value areas.

The theory of sorting stocks based on R4 breakouts is based on fact that market has a mind of its own. We are attempting to align our minds to the market’s mind by finding out the convictions involved in those assets. Once the list is found, our job is to negate it further on fake manipulations due to short squeezes, fake earnings/ hope trades, bankruptcy moves etc. The next goal is to find stocks which have quality earnings or a quality promise which can be justified in logical sense in language of human understanding. It may be a very subtle sequencing of words which leads to a perfect conviction in a good investing.

Here is the list of many stocks listed on NSE whose stock price has crossed above weekly R4 resistance.

Momentum Stocks List for 2024 fulfilling crossing of Weekly R4 criteria.