Momentum Shifting Upwards, but How Far?

May 28, 2008: 7:50 PM CST

If you’re following the intraday charts, momentum seems to be diverging to the upside as selling pressure is waning and buying pressure seems to be picking up, as the shift from supply to demand is comfortably shifting.

Let’s look at the 30-minute chart of the DIA:

Although it’s clearly a short-term shift, we see at least three positive momentum divergences preceding the saucer, U-Turn, or rounded bottom formation occurring in this major market ETF.  Price has now broken above its key 20 and 50 period moving average on this chart, yet remains trapped beneath them on the daily chart (remember short-term momentum precedes long-term momentum).

The signal to exit the short position was given when price cleanly breached the falling 20 period moving average at the close of yesterday’s trading (on this particular time frame).

Let’s take it down to today’s action for a very interesting curvature of price action:

Price made two support/resistance curves, showing the non-linear support and resistance during the day which made for an interesting but rare pattern.  Of course it looks clear in hindsight, but it’s not so easy to trade or recognize in real-time.  That’s why classifying patterns and annotating them at the close of the day can help with pattern recognition in real time for your given time frame.  It’s extremely helpful to combine time frames for a larger picture of potential price action or price structure.

How far might this momentum shift take us?

Not very far, if we believe the moving averages on the daily chart represent a key area of supply or resistance, which tends to happen in a trending market:

I drew a green arrow to show the short-term shift described above, which has relatively limited play to the upside.  The $126 or $127 level could serve as price resistance, which could limit your price targeting on this or smaller time frame charts.

The lesson from this example is that while a short-term pattern may look extremely attractive, always check higher time frames for patterns or potential support/resistance to see how much potential your smaller time frame trade set-up (or structure) might have.

It will be interesting to note what happens when price reaches these above levels, and if buyers can overcome them, it would be against the odds as we interpret them here at these levels.

2 Comments

2 Responses to “Momentum Shifting Upwards, but How Far?”

  1. vinaydh Says:

    I really like the way you explain things here. Can you please recommend any good TA book to me?

  2. Corey Rosenbloom Says:

    Vinaydh,

    Thank you for the comment!

    There are so many books to recommend, but I would start with the classic textbook “Technical Analysis of Stock Trends” 9th Edition by Edwards and Magee. The Master Swing Trader is great by Alan Farley, and there are just so many good books out there that it’s difficult to make concrete recommendations.