I coded my first missile path at 28 years old.
It was 1991 and I was a Captain at the Offutt Air Force Base in Omaha.
The computer systems weren’t quite as advanced at the time, so most of the coding was done manually. The goal was 10 lines of working code a day. (For reference, a completed program consisted of thousands.)
Needless to say, making sure your missile hit its intended target was an involved process…
But at the core of all those lines of code was a simple principle. One you probably learned in high school…
Momentum.
Missiles follow a curved path, rising after launch and falling back to earth. As the missile nears the top of its arc, momentum slows. As it starts to decline, momentum accelerates.
This same type of pattern often appears in momentum indicators. And watching these indicators can give you an edge on other traders.
In fact, it recently would’ve saved you from a devastating crash in a certain streaming giant…
STAY AHEAD OF THE NEWS WITH THIS INDICATOR
Netflix got crushed after earnings last week.
Fundamental analysts were shocked to learn that the streaming company had lost subscribers as competitors continue to grow.
Their shock was clear in the stock price. After dropping 28% in post-session trading, NFLX fell another 10% the next day. All told, about 35% in a single day.
These analysts will always be behind the news. They need management to give them the facts before they can value a stock.
But technical analysts take a different approach. They ignore company fundamentals and look at the price action instead. Because they know that instead of being reactive, technical analysis allows you to be proactive.
They didn’t need to know that Netflix was losing subscribers. This momentum indicator was warning of weakness well before the fatal earnings report:
This is a general stochastics indicator. The two lines at the bottom reflect responses to price action.
One is fast and reacts quickly (blue). And the other, a moving average of the blue line, is slow and has a delayed response (purple).
When the slow line is above the fast line, prices are rising faster than average. That means we’re in an uptrend. Think of this like the initial arc upward after a missile launch.
The opposite is also true. When the fast line is above the slow line, prices are falling faster than average. That’s a downtrend. The “missile” has hit its peak and is turning back down.
George Lane popularized stochastics in the 1960s with this explanation: “Stochastics measures the momentum of price. If you visualize a rocket going up in the air — before it can turn down, it must slow down. Momentum always changes direction before price.”
Because momentum leads price, crossovers tend to occur before price reversals. Traders can use these crossovers to identify new trends.
That’s exactly what happened with Netflix.
The dashed line at the top of the chart shows the most recent signal. It came a week before NFLX crashed.
You can see several other signals based on crossovers, including August and November of last year.
Stochastics was on the right side of these major price moves. It was bullish as prices rose, and bearish in declines. That being said, there were also many trades that didn’t work out.
That’s because this is the default version of the stochastic indicator — a popular tool that lots of traders use. When you use these default indicators, you’re accessing the same information that plenty other traders have. That makes it very unlikely you’ll beat the market.
To do that, you need insights no one else has. You need to build your own trading tools that work for you.
Which is why you need to tune in tomorrow morning. For the first time in these pages, Amber Hestla is sharing how she created her own award-winning indicator — and how you could, too…
Regards,
Michael Carr, CMT, CFTe
Editor, True Options Masters
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Originally published on BanyanHill.com
