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

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

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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