The purpose of this Market Call section is to educate readers in technical analysis patterns and indicators. As with all investment information, you need to research information and consult your financial advisor before initiating any strategies that are contained in Market Call.

Also, you must realize that as with all trading strategies, opinions can change quickly depending on market conditions and developments.

This column tries to present historical examples, potential set ups, and examples of entry and exit strategies.

Also, you must realize that as with all trading strategies, opinions can change quickly depending on market conditions and developments.

This column tries to present historical examples, potential set ups, and examples of entry and exit strategies.

The use of stops and reverses in a trade.

Yesterday, I wrote the following

"Momentum. Let's look at the Momentum indicator used on our charts. The Momentum indicator or Rate of Change indicator is a popular study available in most analytical charting programs. The use of the indicator can vary from trader to trader. Most use it as a trend following indicator, while others use it as an oscillator to help pinpoint possible overbought and over sold conditions. The indicator measures the rate of change in price as opposed to price itself. It is calculated by subtracting the price of x periods ago from the price now. This indicator can also be referred to as rate-of-change (ROC).

As with most indicators and studies, it can be used on various time frames. The same calculation is used for 5 minute, 15 minute, 60 minute or daily price bars. We use it here with 60-minute bars. To reduce the choppiness of the indicator, I prefer a longer period. I then apply a Moving average of the indicator to further smooth this very volatile indicator when using with short time periods. The chart below reflects the smoothed 5 period exponential moving average derived from a 22 period Momentum indicator on 60-minute bars. The conventional interpretation is to use momentum as a trend-following indicator. This means that when the indicator peaks and begins to descend, it can be considered a sell signal. The opposite conditions can be interpreted when the indicator bottoms out and begins to rise. If momentum reaches very high or low values relative to its range historically, a continuation of the current trend is likely, and a change might not be considered until the actual price begins to dip down or rise, respectively. Many technicians will also use it when it crosses from below the zero line for Buys and when it crosses from above to below for Sells. I also like to use it combined with channels and OBV (On Balance Volume)

Let’s look at CMGI, CMGI.

CMGI has a history of being a very volatile stock. Over the past month, CMGI has been going nowhere. The stock has been range bound between 78 and 92. For a volatile stock like CMGI, this range can set up a very tradable base for a trade. These broad ranges can play havoc with trade following techniques as each move in either direction reverses and causes small losses for the trader. But breakouts from these large bases can produce an excellent trade into a new and large trend.

The smoothed Momentum indicator used in these charts can also provide information into the future direction of the breakout. Notice the break on September 3 up out of congestion. A few days later on September 8, CMGI retraced part of the move, but not enough to change the direction of the Momentum indicator.

On September 9 and 10th, CMGI continued to move up and the Momentum indicator is now moving up again. The OBV indicator (On Balance Volume) looks similar in that it did not make a lower low during the recent retracement. Risk vs reward is critical in looking at a trade. I like to use a 3-1 risk reward ratio. If the trade works out, can I possibly make 3 times my risk. In this trade, I feel a close stop can be placed at 86 � while the potential of CMGI breaking out may reward a trader with the start of a new uptrend from a solid base. I am looking for a breakout and major move to start in the next day or two. I would Buy CMGI here. I would place a stop at 86 �."