Momentum Can Be A Good (Or Bad) Thing

As we meander throughout the markets looking for directional clues, it is challenging when stocks hit levels then reverse suddenly in the other direction.  We as traders often wait patiently for a trend to establish and then slowly, gently climb on board.  But since the start of the bear market in 2022 those trends move quickly.  The big moves up or down are just not sustainable, they lack the momentum even if the speed and velocity is enough to change the overall trend, the followthrough capable for sustaining momentum.  

If we come in late to the party we end up sitting through some time when the market is moving against us, and boy does that feel awful.  Recall in 2022 several moves down reversed upward, giving the bulls hope but then smashed those hopes and dreams to little pieces.  Such is the action in a bear market.  Momentum can move a stock up or down, but we usually see down moves happen with so much more speed and velocity, the momentum takes the market or stock down to levels below where most market watchers would expect.  Thus, an overshoot in momentum - often accompanied by a rebound or rubberband snapback bounce.

But we are not always in a bear market.  Sometimes the markets just move sideways with little/no momentum whatsoever.  What is momentum anyway and why is it important?  Webster's definition is <em>the quantity of motion of a moving body, the product of mass and velocity</em>.  While we are not going to explain the laws of physics here, basically when a large body (mass) such as the stock market shows some velocity it can produce momentum in either direction.  It is a simple math equation when you have the variables:  momentum= mass x velocity.  As the SPX 500 has grown in largesse over the years, the mass or size of this body coupled with some high velocity can produce incredibly strong momentum.  

We seek this momentum as traders and investors, especially as option traders.  It is the momentum of a stock that helps us determine the best short or long term option trade.  A stock that shows strong momentum can overcome the time decay factor ever-present in options.  Stocks like Tesla TSLA, Microsoft MSFT, and NVIDIA NVDA show tremendous momentum in both directions, allowing the option buyer to take advantage of the leverage offered in buying calls and puts.  

If a stock can jump ahead of the time decay or theta burn, the option buyer can win.  These stocks are not the only ones exhibiting strong momentum, so identify stock on your stock chart list to find the best performers, and that momentum trend is likely to continue.