Good Stock or Just Hype? Pt. 3: Reading Trend & Momentum Like a Pro
In Part 1, we focused on fundamentals.
In Part 2, we looked at valuation and expectations.
Now it’s time to talk about something many long-term investors pretend doesn’t matter: price action.
Trend and momentum don’t replace fundamentals or valuation. But ignoring them completely can lead to bad timing, unnecessary stress, and emotional decisions you didn’t need to make.
You don’t need to trade every move. You do need to respect what the market is telling you.
Why Trend & Momentum Matter (Even If You’re “Buy and Hold”)
Long-term investing doesn’t mean blind investing.
Stocks move in cycles. Even great companies go through periods where the market isn’t interested. Trend and momentum help you:
Avoid buying into falling knives
Spot when sentiment is improving or breaking down
Add positions with confidence instead of hope
Think of trend as the market’s tone and momentum as its energy level.
The Primary Trend: Is the Stock Moving Up or Down?
Before getting fancy, start simple.
A stock in a healthy uptrend:
Makes higher highs
Makes higher lows
Recovers from pullbacks instead of collapsing
A stock in a downtrend:
Struggles to hold gains
Makes lower lows
Punishes early buyers
This isn’t about predicting bottoms. It’s about recognizing when the market agrees with you.
Moving Averages: The Market’s Mood Rings
Moving averages smooth out noise and show direction.
Two commonly watched levels:
50-day moving average: short-to-medium term trend
200-day moving average: long-term trend
Bullish signals:
Price stays above the 200-day
50-day above the 200-day
Pullbacks find support instead of panic
Warning signs:
Price stuck below the 200-day
Failed bounces
Sharp spikes far above averages followed by fast reversals
When price disconnects too far from its averages, gravity usually shows up.
Relative Strength: Is It Beating the Market?
A simple but powerful question:
Is this stock outperforming the S&P 500?
Strong stocks:
Hold up better during market pullbacks
Recover faster when conditions improve
Attract capital even when sentiment is mixed
Hype stocks:
Rise fast in good markets
Fall harder than the index when things turn
Depend on momentum alone to survive
Relative strength helps you stay aligned with winners instead of fighting the tape.
Volume: The Lie Detector
Volume tells you whether moves are supported by real money or just noise.
What to look for:
Rising price + rising volume = conviction
Pullbacks on lighter volume = healthy pauses
Red flags:
Big price moves on weak volume
Spikes driven by headlines with no follow-through
Price shows what happened. Volume hints at who showed up.
Momentum Is a Filter, Not a Crystal Ball
Trend and momentum won’t tell you the future. They help you:
Avoid emotionally charged entries
Respect when a thesis isn’t working yet
Add when conditions improve instead of forcing trades
You’re not trying to catch the exact bottom. You’re trying to stack probabilities.
Good Stock vs Just Hype: Momentum Edition
Good Stock
Moves steadily over time
Pulls back without falling apart
Holds key support levels
Just Hype
Explodes quickly
Collapses just as fast
Needs constant excitement to stay afloat
Final Thought
Momentum doesn’t replace research.
It keeps you from ignoring reality.
When fundamentals, valuation, and trend all line up, investing gets quieter and more confident. Less second-guessing. Less reacting to noise.
In Part 4, we’ll move beyond numbers and charts to look at the qualitative signs that separate real businesses from hype-driven stories.
Because not everything that matters fits neatly in a spreadsheet.
