Momentum Is Alive and Well

The June Canadian dollar (CDM3:CME) has taken a bit of a beating in recent days. Blame it on the SARS outbreak, a single case of mad-cow disease in Canada or profit-taking after a stunning bull run. Despite a pullback from the contract high, the currency still ranks as a momentum market. And now, after coming in five days off the high, the Canadian dollar may be ready to take a stab at new contract highs in a continuation of its momentum.

Notice how in the following chart the Canadian unit held above a tight Fibonacci clustering of retracement levels -- a sign of potent support. It also closed above its 20-day moving average Wednesday, burnishing that line with a reversal tail. A trade above Wednesday's high -- the high of the low bar in the pullback -- triggers a momentum pullback setup, a continuation play.

Cattle contracts serve as examples of markets that have recently overextended to the upside and, hence, could be ripe for reversals. Notice how both August live cattle (LCQ3:CME) and feeder cattle (FCQ3:CME) have surged after an initial selloff prompted by the Canadian mad-cow scare. The contracts' steep run-ups now leave them overbought in the short term. Neither contract was able to close in the top half of their daily ranges Wednesday, demonstrating weakness and leaving them vulnerable to sellers fading (trading in the opposite direction of) the breakouts. Look for both markets to reverse for several days should they trade below either Wednesday's low or their recent highs.

In a final example of a market that has made a momentum move to the downside, is overextended and may be ripe for a reversal, July cocoa (CCN3:NYBOT) has tanked into what is shaping up as strong weekly support. The chart shows cocoa closed Wednesday into another tight clustering of Fibonacci retracement support. This market also includes a symmetrical relationship where the first downdraft denoted by AB equals CD at the Fibonacci cluster. Symmetrical relationships that coincide with Fib retracement levels have an uncanny tendency to stop markets in their tracks.