A Quick Lesson in Trading Reversals from Support with Divergences

May 27, 2015: 10:09 AM CST

One of my all-time favorite trade set-ups is the play into higher timeframe support with a clear lower timeframe positive divergence.

Let’s unpack these terms, see it as it developed yesterday in the S&P 500, and apply this lesson to future opportunities to trade aggressive intraday reversals (the same logic would apply to any stock or ETF).

Before looking at today’s lesson, be sure to view yesterday’s “Breakdown S&P 500 Market Update and Trending Stock Scan” (which I write each day).

Here’s the quote from yesterday’s update:

“The movement away from 2,130 set in motion today’s fall toward the 2,100 simple target we’ve been discussing.

At this point, the market has achieved a key downside target (2,100) on intraday positive divergences so we’ll be on guard for a bounce up off 2,100.”

With that in mind – “key downside target on intraday positive divergences” – let’s see exactly what happened:

Note the positive divergence – it simply means that price is making lower lows at the same time a momentum oscillator is making higher lows.

It’s a visual conflict or “non-confirmation” that suggests a likely reversal (instead of price continuing lower).

Indeed – note the “R” and green highlight which reflects a very aggressive reversal opportunity.

Buy as close as possible to the 2,100 level, preferably as price is pivoting up away from it, and place a stop-loss under the 2,100 level in the event the strong downtrend continues (negating the divergence).

An additional trigger-buy would be when price crosses above a moving average (I use the 20 and 50 Exponential) or on the break above a hand-drawn trendline.

As was expected, price did pivot (reverse) up away from the 2,100 key level and we saw an instant 15 point rally off the 2,100 level.

This same logic – a Higher Timeframe Support Level – with a Lower Timeframe Divergence – is one of my favorite combination patterns.

Continue studying to see additional examples of this two-step set-up.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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2 Responses to “A Quick Lesson in Trading Reversals from Support with Divergences”

  1. Linked In LNKD Triggers Turbo Breakout Reversal | Afraid to Trade.com Blog Says:

    […] For additional information, check out my prior post “A Quick Lesson in Trading Divergences off Support.” […]

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