The FOMC meeting statement caused an unprecedented move in the Treasury markets. The Fed’s declaration that they would buy $300 billion in Treasuries over the next six months set off the most violent rally in Treasuries that I have seen in my nearly 23 years as a broker. While I won’t tell you that I forecast a move of this size today, I was expecting a rally today-my comment in last night’s Swing Trader’s Insight newsletter was “Momentum buy day”.
Below is the daily chart for June T Bond futures. The bottom panel of the chart is two period momentum, one of the indicators I use for determining swing trading signals. I learned to use this from Street Smarts, the book by Linda Raschke and Larry Connors. They got the idea, in turn, from George Douglas Taylor’s book, The Taylor Trading Technique.
We use momentum to determine potential turning points in markets, by looking for highs and lows-points at which it’s likely that momentum changes direction. As momentum often precedes price, a reversal in momentum often forecasts a change in direction for the market itself. The red arrows in the momentum pane are pointing to the last two lows in momentum. The days following these lows are “momentum buy days”. On a momentum buy day, we’re looking for the market to open on its low, and rally during the course of the session. That’s certainly what we got in bonds today!
If we’re following Taylor’s swing trading technique, we would buy bonds early in the session today and go home with the long position on, looking for upside followthrough tomorrow. We liquidate these long positions on the second day, which Taylor called “sell” days. On the third day, we look for a short term peak in momentum, which gives us a signal for a short sale. The momentum “sell short” day is the mirror image of a buy day-we look for the market to open near its high for the day and sell off during the course of the session, closing lower than where it opened. We take that short sale home, anticipating being able to cover shorts lower the following day, on downside followthrough.
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