Movement begets movement, and momentum begets momentum. The concept that a body in motion tends to stay in motion is basic to physics, and it's called Newton's First Law of Motion.

Also known as the Law of Inertia, the principle more formally states that a body in motion tends to stay in motion with the same speed and in the same direction unless an external force is applied. The concepts of motion and momentum also apply to financial markets, and they underpin market trends.

I've written about how collective signals of nascent momentum can lead to sizable market moves. Coffee, feeder cattle and the Canadian dollar serve as recent examples.

But when multiple markets exhibit signs of momentum at the same time, that can be evidence that a fundamental shift in market forces is at hand.

What Qualifies

First, let's review. To qualify as a potential nascent momentum mover, a market must have made at least five gaps, expansion bars or laps in the direction of the momentum during the past calendar month. A gap occurs as a hole in a chart where none of the price action overlaps from one day to the next. An expansion bar here is defined as the largest range day in a week. Similar to a gap, a lap up is a pop higher where the previous day's close and the next day's open or close don't intersect but the highs and the lows of the two sessions do intersect. (The opposite is true for a lap down.)

Let's look at three markets demonstrating the critical mass of at least five gaps, laps or expansion bars over the past month and then see how they relate. June 10-year notes (TYM3:CBOT) nudged to a record high close last Friday.

Similarly, June Swiss francs (SFM3:CME) have plowed to a new contract high and left a critical mass of telltale signals along the way.

July corn (CN3:CBOT) has accelerated off the test of a contract low. And like the situation pointed out in wheat last week, corn has overbalanced to the upside, paving the way for a reversal of the seven-month downtrend.

The nascent momentum present in these individual markets speaks for itself. They're in redefined or newly defined uptrends. But taken together, here's a scenario that the momentum in the three markets portrays.

The rally in 10-year notes and other debt instruments is in response to the Federal Reserve's desire to ward off "the probability of an unwelcome substantial fall in inflation." This statement was released at last week's monetary policy meeting, and it demonstrates the Fed's new intermediate-term concern. The assumption is that the Fed will become a heavy purchaser of three-, five- and 10-year Treasury securities to fight deflation.

Until a new external force is applied -- until the big buyer or the perception of a big buyer (the Fed) gets out of the way -- momentum in debt prices remains to the upside and has the Law of Inertia on its side.

The U.S. isn't alone in its focus to ward off deflation, a factor that will add to the debt market's upside inertia. The world's three largest economies are all worried about it. In Japan, where short-term interest rates are already essentially at zero, deflation has been a concern for years. And at its monetary policy meeting last Thursday, the European Central Bank (ECB) altered slightly the wording of its policy statement to indicate that it too is concerned about the economic debilitation -- deferred spending -- that can be caused by falling prices.

ECB President Wim Duisenberg confirmed the bank's policy shift after the meeting by saying, "This clarification underlines the ECB's commitment to provide a sufficient safety margin to guard against the risks of deflation." In short, we have the three economies that produce about half of the world's GDP expressing concern about deflation. Their collective concern works to underpin the upward momentum in debt prices.

Inflation vs. Deflation

But while the central banks try to stave off deflation by keeping the rally in debt prices alive, other markets appear to already be discounting inflation.

Momentum in Swiss francs is tied to the debasement in the value of the dollar vs. the euro. The Swiss unit is highly correlated with the euro, and euro strength naturally equates to a stronger Swiss franc. But the momentum here also appears to be the search for a secure, safe-haven store of value, a traditional role of the currency.

Gold, the other safe-haven, store-of-value play, is also in rally mode. In fact, gold is on the cusp of becoming a nascent momentum market itself. The rallies in the Swiss franc and gold look like plays guarding against inflation, not deflation. So where else are the signs of inflation when central banks around the world are cautioning against deflation?

The surge in corn is representative of recent rises in a wide variety of commodity prices. Soybeans, soybean meal and soybean oil are at contract highs. Cattle and pork are also trading at new contract peaks. Wheat surged 40 cents a bushel and finished its best week in years last Friday. And crude oil, unleaded gasoline, heating oil, natural gas and orange juice are trading at two-week highs.

Cotton and copper are conspicuously absent from the group, but they are excused after having been battered in large measure by the SARS outbreak in China. Collective markups in commodity prices generally accompany expectations of higher inflation as higher raw-material input costs are a precursor to higher prices in finished goods.

Expected Fed action -- buying debt or lowering rates that already stand at 40-year lows -- has set the inflation bug in motion. So while central banks around the world attempt to ward of deflation -- until a new external force is applied -- look for markets to adjust to the inertia of higher prices across the board.

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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