Momentum is a term that’s used a lot when talking about the markets. One of the uses is for the momentum indicator, an old and simple way of analyzing a market. Although it’s simple, that doesn’t mean it’s not useful. In fact, I think momentum can be a very powerful indicator; you just need to use it differently than you are familiar with.
John Murphy wrote:
“Market momentum is measured by continually taking price differences for a fixed time interval. To construct a 10-day momentum line, simply subtract the closing price 10 days ago from the last closing price. This positive or negative value is then plotted around a zero line. The formula for momentum is:
M = V – Vx
V is the latest price, and Vx is the closing price x number of days ago.”
On a standard charting package, momentum is usually set to a default of 10 or 20 bars. While this might be useful for a trader looking to gauge a long term trend, but as a swing trader, this wouldn’t be as useful.
For swing trading, I use two period momentum. This jibes with the Taylor Trading Technique I follow, where futures markets run in a loose three day “buy-sell-sell short” cycle (read about it in my Futures Swing Trading Manual here). Two period momentum helps to spot the swing highs and lows t look to trade against.
Below is the daily chart for the September eMini S&P futures, with two period momentum in the bottom panel. I circled the two recent lows in momentum; these lows are the momentum buy signals I refer to in the Swing Trader’s Insight advisory.
Momentum gave 2 buy signals
On a momentum buy day, I look for the market to make a low early in the session, find support, rally over the course of the session, and close higher than where it opened. Thus, I look to buy early in the session on a buy day. The first place to look for support is the previous day’s low-it’s where the market found support on the previous day.
For the S&Ps today, yesterday’s low was 995.25; it had been trading under there for much of the night. This did not negate the buy signal; it just meant we needed to look more closely at price action.
The chart below is a 10 minute chart for today. The initial overnight low was 992.25, so I watched that price for potential support and a long entry area. Looking across, we can see that they retested this area when the stock market opened, which gave us our buying opportunity. From an entry here, I highlighted two initial price objectives- the intraday high at 997.00, which was reached 20 minutes after the pit open. The next objective is the overnight high at 1001.00.
Good retest of the low
If I were holding this for a swing trade, I would look to carry long trades overnight, looking for overnight follow through and higher prices. In this case, given the volatility and uncertain trend, I’d be less likely to take a trend home overnight. I tend to have a shorter timeframe for trades that go against the higher order trend.
I pulled this chart out earlier this morning; subsequently it went down a third time, make a new low by three ticks (another buying opportunity), and has made a new intraday high.
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