Momentum Meter: A Tool to Predict the Direction of Next Move in E-Mini/SPX

Can momentum be used to predict the short term direction of the market? This setup says, yes.

To understand this setup please first read this .

"Momentum Meter" is an indicator that displays momentum in select instruments^a. listed on my Momentum Block. The indicator displays momentum in Equities & VIX futures, and currency markets using hourly bars. A value of +3 and above coincides with gains in  E-mini, while a value of -3 or less with losses. Following panels show how this indicator helped to capture major down falls in each of last three years, including the infamous flash crash of 2010, and water fall decline of 2011.

As this setup has the tendency to repaint last few bars real time signal may get adjusted after the initial trigger. This problem may result in adjustment of initial signal by +/- few hours normally but can be up to several hours. Why several hours? Because one of the element of this setup is Volatility Futures which only trade during CBOE open hours. So if the signal from volatility is adjusted to prior day close, it will reslus in revision of Momentum Meter reading since last day's close.

ES points gained after "Momentum Meter" rises to +5, 2nd time when in long trade.
Since 1/1/2010, Meter reached +50 levels while system was in long trade 10 times. Afterward system logged an average of 42.3 ES points before exiting the trade (meter dropping to -30).

A trading strategy that took a long position in E-mini when indicator reached +30 from being below and flipping to short side when indicator drops to -30, with a 2% stop loss could have made a fortune as shown in the table below^b. Please note the profits are based on gains in ES points.

If you find this stuff enticing, please familiarize yourself with the setup as I plan to make this setup a regular part of my "Morning  Take".

^a. Method to compile the list is described in item #8-11 here.

^b. Past performance is no guarantee of the future.

Momentum Block:Background

To help you understand the value of information presented as "Momentum Block", I will try to explain it in a question answer form:-

1. What is a Momentum Block?
Momentum block is compendium of list of financial instruments or economic measures with a proven record of predicting the performance of US equities.

2. What makes up the Momentum Block?
The list include equities and equity futures (US and International), volatility indices, currency pairs highly correlated with in SP500, and indicators of economic.business conditions in the US. These instruments are listed below. Note, signal status is shown for illustrative purposes only.

3. Why do you call it Momentum Block ?
Because each vehicle on the list is assigned a buy or sell using momentum type indicators.

4. Why momentum?
It is an easily measured characteristic.

5. How do you measure momentum?
I use RSI of multiple moving averages and Heiken Hashi Bar assignment to measure momentum or sometime a commodity channel index based indicator.

6. How do you assign buy or sell?.
A buy is assigned when both MA ribbon and Heiken-Ashi bar for the price of instrument are white (indicating a positive momentum) and RSI of 13 period MA of the price is above 65.
A sell is assigned when both MA ribbon and Heiken-Ashi bar are red (indicating a negative momentum), and RSI of 13 period MA is below 35.
It is just as simple as this. I use only this method for all vehicles and for all time frames.
Note that this setup tends to repaint last few bars, especially after a fast move.

7. This setup is an adaptation of  The 80'S Forex System, and RSI of MA

8. Why do you use hourly and daily setup?
The hourly setup is more responsive than daily. I use hourly for immediate trading and daily to gauge the strength of the move.

9. How can I use this information?
This table is like taking a pulse. I look at it before markets open in US. It gives me a pretty good indication of what is to come.

10. Can you elaborate on "What is to come?", 
Looking back to 2007, I noted that prior to almost all moves of  > 5%  a subset of instruments on the list was either in buy or sell mode when viewed on daily charts. I have created a composite indicator based on these 5 instruments, named it "Momentum Meter"

11. Which instruments are used to construct the Momentum Indicator?
Instruments used to create the Momentum Indicator are determined dynamically. The final list includes one member each from US Equity and Volatility Indices, and three from the currency group. The composition is derived (on last weekend of each month.) by looking at the performance of various combinations during the prior 26 weeks. The best performing group is than used to calculate the Momentum Meter until the next month.

I hope the above information will help you understand the thinking behind creation of "Momentum Block"

Momentum Block

Background information about this table is described here

Status as of May-12-2014 08:00 EST