Tuesday, March 13, 2007

Follow The Momentum



The other day there was a very good post on how momentum precedes price. This is a concept that I've known about since the early 1990's when I first heard about Linda Raschke in the book Market Wizards. It's not the holy grail, but it is a good method to follow if traded consistently.

Looking at the above chart we see the Yen vs the New Zealand dollar. Below that is a momentum oscillator which has just made new highs and has pulled back to the zero line. According to the idea that momentum precedes price, this spread should move back up and retest the high from last week.

The Yen vs the New Zealand dollar isn't something that most of us trade (especially if you are reading this blog), but I think it's something that we should watch since most of us trade stocks. If this carry trade continues to unwind by retesting last week's high, that would spell more trouble for stocks. Let's see in the days to come if momentum preceding price actually works on the above example.

3 comments:

Eric said...

i trade forex but im not sure i understand the significance of that 0 line on the momentum osc. are you calling that the pivot point here?

Kevin said...

The zero line just means the market has pulled back and you should be looking for signals or a price trigger to buy.

Sandro said...

Y vs. NZ$ is quite important.

It could be that a lot of those carry trades are unwinding there, in Far East, but we are in the same boat and feel the pain.

Y/USD looks very interesting. I don't think it will ever break through this magical 114.5 line, because Japan will throw everything to protect dollar, but every tme we get there the market will panic. It could happen many times, actually.

Just IMHO.

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