How To -- Momentum Index

In my ranking tables, funds are ranked according to their Average Momentum Indexes (AMI). In technical analysis for stock price, there are several ways of calculating stock price momentum. For my postings, a fund's momentum is measured by the percentage of difference between the fund's price and its trend line. For example, a fund closes the week at $10 while its trend line is at $9, the momentum of the fund is (10-9)/10. If the fund close the week at $8 while its trend line is $9, the momentum is (8-9)/8. Note that a fund with price above the trend line has positive momentum and a fund with price below its trend line has negative momentum. A trend line is a smooth form of the fund price, usually it is the n-period moving average. The most famous trend line is the 200 day moving average, and I use the 28 week moving average of S&P 500 index as my guide for intermediate term market direction.

Every Friday after the market close, I download fund prices from Yahoo's stock quotes and calculate the momentum index for each fund in the ranking tables. The calculated momentum index, which I called it current momentum index (CMI) is still fluctuated quite a lot week by week because of its short term nature. In order to gauge a fund's momentum over longer period of time (intermediate term), I calculate the moving average of the CMI over several weeks to derive the average momentum index (AMI) for each fund.

The bottom line is that funds at the top of the ranking table are funds identified to have the strongest growth potential in the intermediate term (6 to 9 months). Different trading strategies can then be developed using the momentum rankings.