If you think momentum trading faded in the late '90s, it didn't. Momentum manifests itself in myriad futures markets and stocks -- either up or down -- every day. Profiting from momentum, contrary to what most financial advisers tell you, is a matter of market timing and identifying what phase in the momentum cycle a market is in. A continuum exists in momentum trading. There is a nascent phase, a continuation phase and a reversal phase. Trades can be taken at any point along this continuum. The charts illustrate each of these phases as they unfold in today's markets. Since logging a pair of limit-down days early last month, July pork bellies (PBN3:CME) have displayed signs of nascent momentum. As I've pointed out before, nascent momentum -- the early phase of a major market move -- occurs when five or more gaps, laps or expansion bars take place in the direction of the underlying momentum within a calendar month. Bellies have registered six of these signals since bottoming in April.
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.