Value & Momentum Breakouts

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Below is a summary of JD’s Comprehensive Guide published on Seeking Alpha:
Maximizing Market Returns With The Automated Momentum Gauges (AMG)

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Learn how to use the MDA Breakout Stock Charts

An introduction to the MDA Breakouts Algorithm

There is too much noise in our world. There are far too many distortions and anomalies in the stock market. I have spent most of my life evaluating data as an intelligence officer, fraud examiner, finance analyst, entrepreneur, financial anomaly researcher, and stock trader. I am always assessing which information is most important and which is noise.

The MDA Breakouts Algorithm provides a highly reliable method for classifying individual stocks into the 7 Segments of the Momentum Cycle.

JD Henning

PhD.,CFE, CAMS

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“All models are wrong, but some are useful.”
-George E. P. Box, British statistician

There is no perfect way to model the extreme complexities of the stock market; of human behavior; of panic and exuberance; of earnings surprises and corporate calamities. However, in all my years of trading this model has delivered for me the most profitable balance between signal and noise.

Research in Progress

The MDA Breakouts Algorithm is considered an ongoing research project and the model will evolve over time as research continues. Additionally, many stocks lack the necessary data required to classify stocks into segments. We are working on getting access to expanded data feeds.

The Momentum Gauges were developed out of my Momentum Cycle research to predict large price changes in stocks without using “price change” as the variable to predict. The extreme positive stocks selected for breakout trading are derived from Segment 6 for high positive acceleration based on the Multiple Discriminant Analysis (MDA) screener of 75 variables other than “price change.”

In common momentum trading, traders look for large price changes at the open and buy the stocks going up, basically a one-variable screening process of “price change” to predict price change that has some success. This model leverages the strongest market variables to forecast price change rather than the common practice of using “price change” to try and predict “change in price” in a circular manner.

Do not use the MDA Breakout Charts in isolation of other signals!

Three conditions are needed to do well using the MDA Breakout Stock Charts:

  1. Intrinsic Characteristics. You need a high quality breakout stock with the best intrinsic variables for potential rapid gains. Use the MDA Breakout Charts to identify these stocks.
  2. Stock Momentum Conditions. You need the stock momentum conditions to be improving with large accumulation and inflows continuing for as long as you hold the stock.
  3. External Conditions. You need the sector the stock is in to be improving with large inflows as well as the broader market in positive momentum conditions. Use the Momentum Gauge Charts to identify these trends.

When all three conditions are aligned you will not be fighting against a strong current of market, sector or stock outflows, and your returns will be greatly enhanced. The Momentum Gauges provide reliable indicators about when it is the best or worst time to be exposed to the market. As I often caution members:

You may have the best stock, but if the broader market outflows are draining liquidity even the best stocks will get stuck or worse.

How to read the MDA Breakout Charts

My research is ongoing. I have not identified a single method to use for all 7,500 MDA Breakout Stock Charts. Different stocks tend to follow different patterns of movement throughout the segments. In other words, green does not explicitly mean buy, red does not explicitly mean sell, and yellow does not explicitly mean hold. See the above section about using other signals.

Green: Segment 6 (Positive Acceleration)

Green bars represent stocks that are in Positive Acceleration (Segment 6). These stocks show strong bull market conditions where gains are large and accelerating. The height of the bar (in the chart) and length of the bar (in the data table) indicate what percentage of the trading day the Stock was in Segment 6.

Red: Segment 2 (Negative Acceleration)

Red bars represent stocks that are in Negative Acceleration (Segment 2). These stocks show strong bear market conditions where declines are accelerating. Stocks in Segment 2 may be good candidates for short selling. The height of the bar (in the chart) and length of the bar (in the data table) indicate what percentage of the trading day the Stock was in Segment 2.

Yellow: Not in Segment 2 or Segment 6

Yellow bars represent stocks that are neither in Segment 2 or Segment 6. The height and width of the yellow bars are fixed since the measurement for time spent not in Segment 6 or Segment 2 is not meaningful.

Please review the “The 7 Segments of the Momentum Cycle” section to learn more about stocks in Segment 6, Segment 2, and the other Segments.

The 7 Segments of the Momentum Cycle

The MDA Breakouts Algorithm classifies seven different conditions of “price change” activity into seven segments for analysis.

Rather than using “price activity” to predict “change in price”, the goal is to determine the strongest market variables which best distinguishes between the seven price behaviors illustrated in the seven columns below across the momentum cycle.

Each of these segments has been tested over the years using multiple discriminant analysis (MDA) of more than 75 different variables to find uniquely different predictors for each category.

The resulting “non-price change” variables can forecast the price momentum category in which any market index, sector, fund, or stock belongs to with a high degree of accuracy without knowing actual price-changes.

Segment 1: Negative Reversal

The Negative Reversal segment represents all the market corrections we most want to avoid. Examples of this are all the Momentum Gauge topping signals that have been forecasted over the years. One of the largest such negative signals was the Covid correction of February 2020 that stayed negative until April despite extremely large bear bounces.

The Negative Acceleration segment follows the negative topping signal and represents strong accelerating declines. In these conditions nothing seems to slow the selling and good earnings results are ignored or even punished. This is illustrated by the -35% S&P 500 declines from the negative signal on Feb. 24th to the lows in March before the Federal Reserve intervened with the largest stimulus package in US history on March 23rd.
The Negative Control segment is a phase with negative market conditions and steady declines that are relatively small involving fewer accelerating type declines.
The Non-Momentum segment is when the overall market may be in the process of changing direction or is stalled out with very little cause to either rise or fall. It is also characteristic of frequent sector rotation and choppy markets. In this condition, the positive and negative gauge values would be nearly even and/or both relatively low.
The Positive Control segment is the condition of a positive market with slow and steady gains that do not involve many large positive breakout gains or declines.
The Positive Acceleration segment is the strong positive bull market condition where gains are large and accelerating at a record pace with high net inflows into the market. In these conditions, nearly any stock will deliver positive returns and even bad earnings results are ignored as a strong market exuberance or FOMO buying behavior pushes markets higher.
The Positive Reversal segment represents an early signal of a market bottom toward an initial breakout after a period of steady declines. This often involves a key breakout reading on the Momentum Gauges that confirms a positive reversal market change in direction on the daily and/or weekly charts from negative conditions to positive conditions.