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					                                    THE SHORT-TERM MOMENTUM LINE




      THE SHORT-TERM MOMENTUM LINE

THE TREND LINE SHOWS US THE DIRECTION TO
TRADE A MARKET; it is the direction line. The
intermediate-term momentum line (ML) indicates
approximately when it is best (in terms probabilities and
risk/reward) to be positioned with the trend; the
ML confirms the trend. And
finally the short-term momentum line (the Short Line or
SL) helps us time entry and exits trades; it is
the timing line.
The basic function of the short-term momentum
line (SL) is to indicate, with reasonable

reliability, the price energy flow of the past few days.
The SMR short-term momentum line
does this as well as can be expected, considering how
erratic short-term price movements the futures markets
tend to be.
Of the three SMR trend/momentum lines, the SL moves
the most erratically and irregularly,
meaning it shifts direction much more frequently than the
other two. Despite this relative
inconsistency of movement, the SL's primary use is to
help determine specific timing of trades.
(This emphasis on short-term timing is why in my first
book I referred to this line as "Timing Line.")
I have compared the movement of price to a river
flowing into an unknown future. When looking
at this "river" of price energy, I visualize the trend as the
"current" of the river and the intermediateterm
momentum (ML) as the "tide." In the same vein I
visualize the short-term momentum line
(SL) as the "wind." However, not an ordinary natural
wind but more like a wind from a mythical
"wind god" who needs to take a breath periodically.
What I mean by this is that surges in the are invariably
interrupted by periodic pauses or countermoves. Prices
act similarly. Even strongest price surges have brief
pauses and minor countermoves.
Another way to look at the SL is to think of it as a boxer
throwing a punch. The SL indicates
potential short-term surging (or punching) power. For
example, if the trend is solidly up but SL is on a several
day dip and around recent lows ("recent" compared to
lows of the past few
months), then this indicates any minor counter-trend
move should close to ending. This
combination (trend up, SL near recent lows) indicates the
market has some potential buying
power. It is similar to a boxer who has cocked his arm
back and thus has substantial punching
power ready to be unleashed.
On the other hand, consider a situation with the trend still
solidly up, but this time the SL is on multi-day up move
and is around recent highs. This combination indicates
potential short-term
energy may be somewhat spent and thus the price may be
temporarily overextended to the upside.
It is the equivalent of a boxer who has extended his arm
(i.e., thrown his punch) and thus does have much short-
term punching energy left. In boxing terms, the boxer's
arm is extended and he will have to pull it back at least a
little in order to build up some punching power again.
Whether visualizing the SL as wind from a mythical
"short-term, price energy flow god"or as arm of a boxer,
the basic point is the same:The SL is closely connected
to short-term (few-day)
price moves. Prices do not move in a straight line; they
surge and pull back. Therefore, recent
patterns of the SL give a fairly good read on how much
potential short-term energy a price move
possesses at any specific time.
Trading is a numbers business. No amount of words or
images, no matter how clever they may
be, can ever change the numbers (i.e., prices). That is the
difference between words and numbers,
as well as the difference between word and image
professions and numbers professions. Words
are infinitely malleable, the truth of their meaning totally
dependent on the honesty of the
speaker or writer. Numbers, on the other hand, are
completely inflexible, even if the speaker or
writer is totally dishonest. Numbers/prices do not lie;
they are what they are regardless of who
speaks or writes them. Being clever with words and
images does not help a trader. In fact,
cleverness with words is a hindrance in trading because it
diverts attention from truth—from the
reality of the numbers.
The self-righteous die young in trading. It is the humble,
cold-eyed realist, with enough arrogance
to act decisively, who survives and prospers in the
trading game.
Of the three SMR trend/momentum indicators (lines), the
short-term momentum indicator (SL)
requires the most interpretation or art. Fortunately, most
of this interpretation is basic common
sense—such as up is positive and down is negative. Both
the direction and location of the SL are
important; however, unless the SL is at recent highs or
lows, the direction is more significant than
the location.
Following are some tendencies of the short-term
momentum line. Naturally, since the SL is just
a short-term indicator, all these tendencies apply for only
a couple of days, at most. Furthermore,
these tendencies are only tendencies. They are not
reliable enough to override clear and solid
overall line patterns (of the trend/ML, and of all three
lines together). Therefore, apply and use
any of the following tendencies lightly.


1 ~ In terms of direction:The sharper (i.e.,
faster) the SL is moving up or down, the more weight
its current directional move should be given (for the next
couple days). Conversely, the
shallower (i.e., slower) the SL is moving up or down, the
less weight its directional
movement should be given.
2 ~ In terms of location: The SL's position relative to its
recent (i.e., past few months) highs
and lows is meaningful. The closer to these recent
highs/lows the SL gets, the more likely
the current short-term directional move is about to end,
or at least pause.
3 ~ Higher highs and higher lows is a sign of strength,
and vice versa.
4 ~ An SL pattern something like this " I" (sideways
followed by turning up sharply) is more
positive than a pattern like this "I " (sharply down
followed by moving sideways) and,
of course, the same is true if you turn these patterns
upside down.
5 ~ A sudden (one or two day) increase in the speed of
ascent or descent of the SL is meaningful
since it indicates an increase in short-term price
momentum.
6 ~ Divergences between price and SL are meaningful. A
price/SL divergence occurs when one
of the two (price or SL) makes a new recent high
(measuring over the past couple weeks)
and the other does not. A divergence where the price
reaches essentially the same recent
high, but the SL misses making a new high by a
substantial amount is more reliable than
the reverse. In other words, when price and SL diverge
(in making or not making new
highs/lows) you should treat the SL as a more reliable
indicator of the future than the
price. (Note: Following is an in-depth explanation
of price/SL divergences, along with a
chart full of examples that will make all this much
clearer.)

				
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posted:10/9/2012
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