Bullish Divergence.
Price low B was lower than price low A, while momentum C was higher than momentum D, thereby creating bullish divergence.
I FIGURE 11.8 Bullish Divergence. Price low A was lower than price low C, while momentum low B was higher than momentum low D, thereby setting up bullish divergence.
11 / Advanced Technical Methods for SSFs 135
I FIGURE 11.9 Bearish Divergence. Price high A was higher than price high C, while momentum at B was lower than momentum D, setting up bearish divergence.
Bearish Divergence
The Key to Momentum Divergence
The key to using momentum divergence effectively in trading is timing. See Figures 11.11 through 11.14 for specific examples of buy and sell signals generated after momentum divergence patterns have developed.
Finding the Signals
Figures 11.11 through 11.14 illustrate buy and sell signals. As you can see, in the case of bullish divergence the momentum high (point E on Figures 11.13 and 11.14) is the buy points that, once penetrated, yield a buy signal. Figures 11.11 and 11.12 show bearish momentum divergence. Point E in this case is the sell point; once it has been penetrated, a sell signal develops. Remember that the momentum is what triggers a buy or a sell signal, not the price be havior of the SSF contract.
I Momentum/Moving Average (MOM/MA)
Still another method of timing SSF trades is by using the momen tum indicator (MOM) previously discussed with its moving average. The simple rules for this combination indicator are as follows:
• Calculate a 28-day momentum indicator.
• Calculate a 28-day moving average of the momentum indicator.
• When the 28-day momentum indicator rises above the 28-day
moving average of the momentum indicator, a change in
trend to the upside has likely started.
• When the 28-day momentum indicator falls below the 28-day
moving average of the momentum indicator, a change in
trend to the downside has likely started.
• Buy and sell signals are generated accordingly.
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