(This is the 17th article in a series of articles on basic technical analysis originally published in Futures magazine.)

I shot an arrow into the air.
It fell to earth, I knew not where.
But as it climbed, one thing I know.
When at its height, it began to slow.

With apologies to Henry Wadsworth Longfellow, a real poet, that bit of verse illustrates the essence of momentum studies for traders. At some point, the flight of an arrow – or a rocket or a bullet – begins to slow down, and the object starts its descent.

Markets usually don’t move up as directly and as smoothly as arrows or rockets, of course, but their movement does have some similarity with that of arrows and rockets in that price moves tend to run out of steam eventually. On a chart, it may be called topping action as bears inevitably begin to take over control. The same kind of action takes place on the downside as selling pressure weakens and markets bottom out and find a base before moving higher.

Moving averages and various chart formations do a good job of showing you the trend but only after it’s under way. They lag price action. What many traders want is an indicator that tips them off that a move is approaching a top or a bottom and is getting ready to go into a new phase.

Two indicators that measure the velocity of such market moves and show you whether they are increasing or decreasing are “momentum” and “rate of change.” Both compare the current price with the price a specified number of bars ago. Their charts look the same, but momentum is usually expressed as a price and rate of change as a percentage.

If you want to measure how fast a market is moving, divide today’s close by the close 10 days ago, for example, to get the rate of change (you may want to multiply by 100 to avoid decimal points). Or, subtract today’s close from the close 10 days ago to get a momentum number as a price. In either case, your result will oscillate above and below a 100 or zero line.

When the indicator is above the 100 or zero line and rising, prices are accelerating to the upside. When the indicator is above the 100 or zero line and falling, the market is advancing but more slowly than before. The same principles apply when the indicator is below the 100 or zero line.

These indicators give the trader / analyst plenty of flexibility. You can vary the number of periods. You can use prices other than the close – the open, high or low or some combination of all four or even a moving average of any of them. You can depict them as a line chart or a histogram. You can use a variety of parameters to develop trade signals – a crossover of the zero line could signal a reversal, for example, or an extreme reading of the indicator might suggest a top or a bottom.

As with most aspects of technical analysis, relying on these indicators for trading signals is not quite that simple, of course. One disadvantage of indicators such as this is that they may arrive at a signal point and then keep moving higher or lower or just hang in a signal area for an indefinite period of time.

Perhaps the most useful way to look at these indicators is in conjunction with the price pattern and other technical indicators. The E-Mini NASDAQ 100 futures chart illustrates the divergence and convergence of prices and a 9-day momentum. Prices exceed the previous high in February, but the high in momentum is lower than the previous high (1), suggesting that the market advance is losing velocity. Similarly, while prices reach new lows in March and April, the lows in momentum are not as low as the previous low (2), an example of converging trendlines that suggests the market is not as weak as price action alone might indicate.

Taken alone, these indicators might be expensive signals. But, putting them into context, they can be an early clue that something about the strength of the market is changing.

Next week: Oscillating indicators