Momentum is one of my favorite indicators for swing trading.  I find that two period momentum can do a good job of highlighting potential short term trend changes and trade opportunities.

I look at the markets in the framework of George Douglas Taylor’s three day, buy/sell/sell short cycle.  The key days are the buy day and the sell short day. On a buy day, I look for momentum to make a short term low and reverse higher, generally along with the momentum reversal there is a price reversal and rally.  This gives a buy opportunity.On a sell short day, momentum makes a short term peak and reversal, with price reversing and turning down.

The past few days have seen some pronounced trends as stocks and many commodities have sold off, and Treasuries have rallied.Momentum indicates that today may see some of those moves reverse; let’s look at Treasuries for an example.

On May 7 bonds had a downside breakout of a channel (the blue horizontal lines), coinciding with the peak of the equity rally.  This selloff pushed momentum (the bottom panel of the chart) to a buy level.  This buy signal started a rally on May 8, mirroring the start of a selloff in stocks.

Yesterday, then again last night, bonds tested the top of the old channel at 123-04.  At the same time, momentum had peaked on May 12.Normally I would expect yesterday to be the sell short day (the day to establish short positions) but the range contraction and doji bar on Tuesday was a breakout setup for the following day. Swing Trader’s Insight subscribers know that a breakout setup trumps the Taylor cycle, so yesterday’s breakout rally pushed the sell short signal to today.  In addition to the sell short signal for today, there is a tendency for breakout moves to reverse themselves the following day; this could add to the selling pressure.

On a sell short day, I look to sell around the previous day’s high, preferably early in the session. This sell point was 123-02.5, and roughly lines up with resistance at the 123-04, the top of the channel.  At this point, I would have stop losses for this trade down to a breakeven; if it trades back through that point it will be likely that today won’t be a down day.

On the downside, I’d first look at the red up trendline; it comes in at 122-11 today.  The next objective would be the Fibonacci retracement level at 121-28.4, then 121-14.  A day or two decline (should it occur) should set up the next buy opportunity.

Momentum leads the way

Momentum leads the way Swing Trading Treasury Bond Futures

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