Trading the Crest of Futures' Momentum

Detect subtle momentum cues, climb aboard, and ride the crest. That, in large measure, is the crux of momentum trading. Among the many ways you can detect momentum cues before substantial moves take place, one approach is to observe a market's action around its simple 10-day moving average.

June natural gas (NGM2:NYMEX), Canadian dollars (CDM2:CME) and British pounds (BPM2:CME) are yielding clues around their 10-day line that identify them as potential momentum plays.

Natural gas had been in a momentum phase, gaining as much as 55% during March. A sharp pullback in early April put the rally in doubt. But on Monday, the contract saw its biggest up move in a year. Notice how there was no hesitation: Natural gas punched through the 10-day line with force and closed on its high of the day.

After a sharp setback, an obvious milestone like the 10-day moving average should provide some resistance. It didn't. A thrust of this magnitude says that this market wants to remain in a bull phase. Additional confirmation of a possible bull phase will come with consecutive closes above the 10-day moving average, with the next resistance at 3.550.

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Unseasonably warm weather across much of the U.S. Monday produced record-setting temperatures in parts of the Midwest. The heat wave helped catapult natural gas to its heady gains.

Natural gas can be weather-sensitive because the fuel is increasingly used in electricity-generating plants throughout the U.S. as a cleaner-burning alternative to fossil fuels. Electricity demand surged Monday as businesses and homes cranked up air conditioners. Wholesale electricity prices hit seven-month highs in Ohio and the Northeast.

Canadian dollars closed above their 10-day moving average three days ago, but Monday's action at the 10-day line was telling. The contract plunged from opening levels to tag the line and then quickly retraced higher to close on its session high, also a two-week high. The strong rejection of the moving average identifies the line as support.

Also notice that the Canadian dollar left a tail at the moving average and that the 10-day line is curving up right at the 50-day moving average. This could turn out to be a classic bullish moving-average crossover signal.

Finally, during the past month, the British pound has only closed once below its 10-day moving average, an indication of upside price persistency and support.

The pound has consolidated, with the lows from the past four sessions consistently remaining above the 10-day line. The narrower-than-normal range from recent sessions increases the odds that the British pound will springboard out of consolidation. Why? The nature of markets is to thrust, pause, thrust, and pause again. Markets are mean-reverting with periods of higher-than-normal volatility followed by bouts of below-average volatility.

The return to and consolidation just above the 10 day moving-average line is providing two clues. One is that the pound will hold support at the 10-day and maintain its upside bias. Second, the British pound now has a higher-than-normal chance of returning to normal volatility by bursting out of a narrow consolidation.

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Marc Dupee is an independent trader and co-author of the book The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to Marc Dupee.

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