The one indicator that works in every market

Look out for momentum divergences in the charts, says John C Burford. They allow you to time your trades with pinpoint accuracy.

The euphoria of stockmarket investors, prompted by last Friday's stunning US economic reports, has continued into this week. The sharp daily rallies have more than a whiff of short covering about them. But as I wrote on Friday, a big rally phase was flagged long before the reports were released. That gave traders an opportunity to cover at least some shorts and perhaps test the long side.

It was the large momentum divergence the previous week (as highlighted in this chart) that gave the game away:

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.
15-10-2-MWT-4

Since then, the market has responded to that momentum divergence stimulus by moving even higher:

15-10-7-MWT-2

But are there any other very recent examples of momentum divergence that can back up my claim to its universal usefulness?

Advertisement
Advertisement - Article continues below

Remember, I consider this particular indicator valid only when the market has been in a sustained trend and when it appears it often signals the end of that trend and the start of a new one. I rarely use it when the market is in a congestion zone it can give many false signals.

How momentum divergence works

If this high or low is met with renewed buying (or selling), the market will often make a new high (or low) as disappointed new shorts (or longs) combine with stale shorts (or stale longs) who fear the trend will continue.

But if the buying (or selling) pressure is weaker than before, the market will often reverse because selling (or buying) pressure then starts to dominate. This internal process is captured nicely by the simple momentum indicator which registers a lower (or higher) reading on the second leg. This is called a divergence with price.

As prices make new highs (or lows), the momentum fails to confirm the move and give you an instant opportunity to act.

Here is the hourly chart of the T-Bonds (30-year) one of my favourite trading vehicles that shows a magnificent momentum divergence at a recent low. Late last month, the market was trending down in fact, if you peer closely, you will see a small-scale five down on the left-hand side of the chart and the momentum divergence which was massive appears right at the final fifth wave.

15-10-7-MWT-3

The scale of that divergence pointed to a sharp rally, which materialised. Major profits were available for those traders watching this indicator.

Advertisement
Advertisement - Article continues below

Commodities, equities, currencies momentum divergence is always useful

tramline

15-10-7-MWT-4

Momentum divergences can also be found in many individual equity charts. Below is the chart for Royal Dutch Shell, on which I have a valid Elliott wave count with the market near the termination of a major fifth wave. In addition, my fifth wave also contains five sub-waves with the final wave possessing a huge momentum divergence:

15-10-7-MWT-5

Remember, the larger the divergence the sharper the recovery. We shall see how high Shell can climb, but already this morning crude oil (US) is trading near the $50 region well up from its recent $38 low.

There is even a divergence on Shell's hourly chart. Just as in the example of silver above, I have good tramlines working with a solid momentum divergence at the low:

15-10-7-MWT-6

Finally, there is a massive and lengthy divergence in USD/CAD. The Canadian dollar has been hammered along with commodity prices, but with the latter showing signs of life, USD/CAD has plunged by four cents in the past week. There is also a budding momentum divergence presently forming which could possibly signal a rally ahead.

15-10-7-MWT-7

So, in the last few days, we have seen impressive momentum divergence signals in several major markets. And in about every case, these have signalled substantial moves that a swing trader could capitalise on.

Advertisement
Advertisement - Article continues below

This is a very simple, but effective, indicator that any trader can use to pinpoint great trade entries.

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/economy/600838/money-minute-monday-17-february-good-news-ahead-for-the-uk-economy
Economy

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020