Ask The Trader
Wednesday, February 21, 2001
What is your definition of a momentum stock and how do you identify them?
Like everything within the realm of charting, there is the cut and dry definition of a metric and then there is the "art" of applying that metric. Each chartist will naturally utilize a metric or indicator in differing ways. One application of a metric is not necessarily better or worse than another, as long as the chartist sticks to the underlying concept behind that metric.
Getting to our question, the classic chartist's definition of a momentum stock is one that is exhibiting a clear up (or down) trend with volume increasing as the stock moves higher (or lower).
In order to expand the horizon of stocks that we believe offer superior near-term risk/reward scenarios, Splittrader has taken some liberties when defining a momentum stock. Instead of waiting for a stock to prove that it has momentum in the classic sense (as we did in the above example of the UTEK trade), we will pick a stock as it is just breaking out of a base or coming off a well defined bottom on strong volume. This goes against the classic definition of momentum since we have not waited for the two key ingredients, defined trend and building volume. However, we call these stocks "momentum stocks" in order to differentiate them from our other two types of trades, those being split run plays and split candidate plays.
The above example of our recent pick, Krispy Kreme (NASDAQ:KREM), illustrates the fact that KREM was not a momentum stock in the classic sense, but served our purposes as a high risk/reward short-term trade. We picked it off an area of support that had held up under heavy selling pressures three times over the past year. We were banking on the fact that buyers would step up again at this level and take the stock higher, hopefully turning it into a classic momentum stock at some point in the near future.
Good Luck and Have a Profitable Trading Day
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