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Momentum Decay

Market Sentiment, Market Mechanics, Momentum, Physics

Note: The Momentum Decay indicators was specifically designed to display information on a 1 min SPY chart.

Momentum Decay measures how strongly market energy is decaying.

Abstract Root Concept:
Higher energy states in markets naturally decay towards low energy states (Or zero energy). When a market deviates from its natural state of decay it implies strength/weakness by the prevailing conditions. Markets also tend have natural tolerance levels to particular rates of decay.

Example 1) NYSE Market Energy Positively outperforming natural decay:

When energy not only stays above it’s targets but continually outperforms itself is growth. In Example 1 the decay level began near zero and continued to strengthen the entire day – this indicates growth and is a strong directional signal. Growth is when energy levels rise for most of the day. Growth strongly pressures prices.

Example 2) Decay Level associated to relative effectiveness:

If it worked before it’s assumed it will work again. In Example 2) the previous effectiveness at particular value of decay will resurface if Decay tests that value again. This is very useful in structuring range expectations and trends.