Momentum at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Momentum

Momentum is the measure of a price difference (change) over time. The amount of price change and how long it took are the basis for many different indicators that have been developed to help provide information on price, volume and trend integrity. When the trend in momentum reverses but price trend does not reverse, a divergence is said to have occurred and warns of a potential reversal of the price trend. When the trend in momentum reverses price does not always follow and so it is necessary when looking for a reversal of the price trend to wait for confirmation even if a reversal of momentum warns that price may reverse.

There are many different types of Momentum indicators that have been developed to track momentum in the markets. Some of the most common include Rate of Change (ROC), MACD, Stochastic, Williams %R, Relative Strength Index (RSI), Ultimate Oscillator, and Price Oscillator.

Momentum Indicators have interpretive characteristics that are specific to each indicator but they share a few common methods of interpretation. Some momentum indicators have overbought/oversold area's that warn of a higher potential for a price reversal to occur when the indicator value falls into these area's. At times momentum indicators will diverge from price which also gives warning of a higher potential for a reversal in the price trend to occur. Other methods of interpretation include the use of trendlines, the identification of price patterns on the indicators and crossovers.

Price rate of change is plotted for BMC Software on the graph above and shows a number a divergences indicated with numbers and a line drawn over the period. When a momentum indicator and price diverge, it gives a higher risk of a reversal of the price trend. The longer a divergence is in effect the more drastic the reversal is likely to be. The caution is to wait for price to reverse as indicators and price can be in a divergent state for extended periods of time. The more divergences that take place within a specific period of time, the more significant in terms of the eventual price reaction should one occur. Not all divergences will lead to a reversal of the price trend and so supporting evidence such as trendline penetration or breakout from a price pattern can be used to develop trading strategies to make use of these interpretive methods.

Signals

This is an example of an inverted head and shoulders pattern on a MACD 26 day EMA. Price patterns when they appear in Momentum indicators can give indication of trend reversals or otherwise the direction of the next leg of the expected trend. An inverted head and shoulders pattern is a trend reversal pattern that indicates that price will break away from the down trend leading into the pattern and rise on penetration of the neckline.

The blue arrow on the price graph indicates the point at which there is penetration of the neckline in the head and shoulders pattern that forms on the indicator. This is the buy signal.

Generally, price projections can be made by measuring the price change from the peak of the head to the neckline and then projecting that distance from the point of breakout in the direction of the breakout. It is often better to project the percentage change that occurred between the peak and the neckline rather than the price change itself.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.