Tradefair Weekly Update / Editor / 14 August 2008 / Leave a comment

Buzzwords of the week; tip #8

Some analysts like to put indicators on to their charts to help them interpret the price action. One popular indicator that is available on the Tradefair Spreads platform is called Momentum. This compares each period's price with an earlier price - the amount of time between those two periods is defined by the user. The indicator helps examine if a trend is gathering pace or slowing down. In particular it helps to spot the end of downtrends. Look for price to make a new low, but for the indicator to make a higher low. The technical term for this is divergence (the action of the indicator is divergent from price action).

The information in this email is for educational purposes only, it does not constitute advice and should not be construed as solicitations of any order to buy or sell. Past results are not necessarily indicative of future results.

Technical Tip of the week

Using the Tradefair Spreads platform, you can add the Momentum indicator on to your chart by clicking on Settings, put a tick in the Momentum box, and also in the box labelled "%", then type in your choice for the look back period of the price comparison. Commonly used settings are 10, 12, 20 and 28. Generally a signal produced from a higher setting like 28 will tend to produce a longer move.

Will the Aerospace and Defence sector keep its strength up?

The Momentum indicator accurately called the end of the downtrend in the Aerospace and Defence sector. Look at the chart of Cobham, in particular at the section between the two vertical lines on the chart.

On 20th June price made a new low around 184, then on 15th July another new low around 177. Now look at the 28 day Momentum indicator on those two days - on 15th July it was much higher than on 20th June. A classic example of indicator divergence!

If you were short at that point this was a powerful warning sign to get out, or at least reduce the size of your bet. Traders who use this indicator to go long usually look for an additional sign that the downtrend has ended.

On 18th July they got that sign, when price moved above the high made on 9th July. You could have gone long at 196p then, with an initial stop say 5% away at 186p, and a general expectation that if the bet worked out well it would last over a month. If you had bet £10 per point on an up bet on Cobham on 18th July, risking £100, by 8th August you would already have been £200 in profit.

The sector has been outperforming the FTSE100 in this period and Cobham itself is near its all time high price. Traders who are long in this sector will now be watching closely to see if the sector keeps its strength up.

To view an example of the Momentum indicator using the Tradefair Spreads platform click here.

Key Companies within the Aerospace and Defence sector

Why not have a look now at what some of the key companies are doing in this sector; live prices available on Tradefair Spreads

• BA Systems
• Rolls-Royce
• Cobham
• Meggitt

For spread betting on any of these compaines click here

Happy trading!

The Tradefair Spreads Team