Using the Momentum Indicator for Swing Trading

I find one of the most useful indicators for swing trading is two period momentum.  Linda Raschke discussed using in Street Smarts, as a way to see where you are in the buy-sell-sell short cycle of George Douglas Taylor (who laid out the method in The Taylor Trading Technique).  For more discussion of swing trading, see the web site for my Trade or fade service here.

Momentum is a simple indicator. The formula is: PRICE – PRICE(x), where x = momentum interval. So a two period momentum is the latest close minus the close two periods earlier.  This is plotted, and we look for momentum highs and low to forecast turning points, first for the direction of change of momentum, then change in direction for price, as momentum often precedes price.

Yesterday saw big rallies in stocks, and lots of commodity markets with it.Given the rally, the primary question to ask was whether these rallies would see followthrough, or were likely to reverse?    Given the predominant downtrend for stocks and many commodities, I was looking for down days (and short sale opportunities) today, and that’s what we’ve seen so far today.

First we’ll look at the NASDAQ.  The bottom pane of the chart is momentum, with the last couple of days highlighted.  Yesterday’s rally pushed momentum above the zero line for the first time in the past five sessions, so I was looking for a sell short day today.That is what actually transpired in the Naz, as it opened near yesterday’s high and sold off.  I added Fibonacci retracement levels to the past two day’s rally to show ideas for where I was looking for profit objectives.

Next is April Crude Oil.Yesterday’s strong rally pushed it slightly above the high of February 20^th, which I had for the price objective for this move.  As with the NASDAQ, the high in momentum gave us a sell short signal, and that’s what’s developed so far today.  Again, the Fibonacci levels are giving us profit objectives. The fact that crude is giving up a smaller percentage of its gains shows that it has a more positive trend.

Lastly, let’s look at May Soybeans.  On the bean chart, you can also see that there was trendline resistance at today’s high, coinciding with the sell short signal.  It has blown through all the Fibonacci support points, and the trendline off the past three day’s lows. The next downside objective is the March 2 low at 838-2

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