Look at the momentum of conviction

The following chart summarizes the S&P 500 ETF (SPY) and its price movement since Wednesday, January 18, 2023. The market experienced a short-term topping event that fueled a very strong selloff in a 24 hour period. The selloff started on Wednesday at 10:30 am. Pay close attention now to the indicators under the chart.

Those are known as Momentum Oscillators. They are – in order – the Relative Strength Index, the Moving Average Convergence Divergence (MACD), the Money Flow Index, and the average directional index (ADX).  The Relative Strength Index measures stock movement on price. When stocks are overbought, the reading is above 70. When stocks are oversold, the reading is under 30.  The Money Flow Index is a reading of price and volume. It measures momentum, and stocks are overbought when the indicator is over 80. When it’s oversold, the number is under 30. The MACD measures stock movements on the exponential moving averages of two time periods. The black line drops under the red trend line when momentum breaks down. When momentum is positive, the black line moves above the red line.  The ADX is similar. It measures price divergence on a 14-day level and given that algorithms track around these indicators, a negative move tends to correlate with a selloff in the stock.  I know a lot of people who only trade one of these indicators.  Don’t do that. You need to combine all of them at once. You need to track them.