The setups I include on this blog are used in conjunction with the 3/10macd and the criteria I ascribe to it as a way to alert me to an existing condition of price. The key concept to take away from this blog is that I try to anticipate what will happen on the higher time frame by using a faster time frame to trigger the trade setup. I do not trade a "system" I use two indicators to clue me in to price conditions. Please read the Disclaimer located in the sidebar of this site. I can be contacted via email at
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Monday, November 15, 2010

using momentum

  An issue I've always had when in a trade, or looking to enter a trade,  was trying to project where my price target should be.  I'm flipping through daily charts, looking at wicks, moving to 30min chart bollinger bands, getting a target number in mind and then wondering, "Why'd price stop there and not my arbitrary target?"
One of the easier methods I have found for projecting a target (for at least half position) is simply projecting a Fib. Retracement off of the most recent momentum impulse and using the 50% extension as my "at least" target.  In other words, a measured move, dur!

Momentum Impulse
     A movement in price that exhibits a wider range in a shorter period of time.  Of course this is relative to the issue and timeframe you're looking at, but it should be obvious when you look at a chart and see big versus not so big bars, and sideways versus linear movement.  Especially obvious in the opening session where there are gaps with continuation or rejection.

Here are two examples from today:

APA gaped up this morning and within 10-min retraced half of the Close-Open gap range.  Normally I would look for support from this 50% level, so a failure can tip off weakness.

The 50% retracement  failure led to a gap fill, giving us a momentum leg.  I'll then measure these 3 candles, as it represents momentum.

  At this point I wait and see how/if/where price is going to retrace this momentum impulse.  APA showed a wick rejection close to the 50% retracement (an excellent confirming signal!) so I'm thinking short and looking for any further retrace testing.  What followed was increasingly narrow price contraction before a failure of the lows.
  My primary target = 50% extension off of the initial impulse.  Afterwards you can judge strength of price for potential further downside.  As you can see, each extension level (50% and 100%) was sliced through on a solid bar, while the 150% extension was wicked and followed by short covering.

RIMM had a similar open this morning.  Momentum on the gap up, but the 50% failed to hold any support, instead showed strong downside momentum.
  Following this downside momentum price wicked no more than 38% of it's previous  momentum.  Price then broke down, hitting our primary and secondary targets (50% & 100% extensions), though instead of slicing through them (as they did in APA) they were wicked (not necessarily a sign of continuing momentum).
So, once we can pinpoint momentum we can at least determine a primary target and size our position accordingly.

As an aside:
   I've noticed that when you have strong directional momentum that isn't immediately tested (like in the APA chart where we had a wick test near the 50% almost immediately) then price tends to drift back in that direction for a test.  Case in point, AGU today, notice how we have 15-minutes of downward price momentum and zero testing of the previous bar's range.  Once price found support it then drifted up to test the range that it previously sliced through: