Browsing “Trade Set-Ups”

Perfect Bear Flag Example Intraday SPY Jan 29

Jan 29, 2010: 6:43 PM CST

I always enjoy highlighting good educational examples that occurred during a particular trading day - if anything to archive it - and today gave us a great example of trading a Bear Flag structure intraday… actually the whole day!

Let’s take a look at the 5-min and 1-min intraday SPY chart (identical on the @ES futures) chart for a fun lesson on flags.

What I’m showing is the 20 EMA (green), 50 EMA (blue), standard Bollinger Bands, and the NYSE TICK (lower panel).

Price formed a relentless sell-off into 11:00am CST, formed a quick rally/retracement into resistance (50 EMA and Upper Bollinger Band) and then collapsed in a “Measured Move” bear flag formation down to the expected target.

The new intraday TICK lows (along with new price lows) highlighted the odds for lower price lows yet to come, and the price rally into resistance served as an excellent spot to short in anticipation of an afternoon sell-off.

As price rallied into the expected resistance area, a negative TICK divergence formed, which further increased the odds of a move lower into the afternoon.

See the 1-min chart below to observe that price also rallied into the 38.2% Fibonacci Retracement - which aligned with the 50 EMA on the 5-min chart.

It’s really neat when you see these concepts come into alignment in real-time intraday, and it enhances the odds of putting on a successful trade.

Should price continue rising, the stop-loss point is also clearly defined:  the $109.00 level which is a confluence of “Round Number” resistance ($109 itself) and the 50% Fibonacci Retracement.

The target - should it be hit - is also clear from a flag - it’s the 100% Price Projection (the $107.30 level).

For a detailed lesson on how to project a target for flags, see my prior post:

How to Project a Measured Move of a Bull Flag.

Also, view my Educational Page on Bull and Bear Flags for more information.

For conservative-style traders, the entry is as soon as price firmly breaks beneath the lower (rising) trendline, while aggressive traders would execute (put on a trade) as soon as price rallies into resistance and perhaps forms a reversal candle for additional confirmation (such as a doji).

I explain this concept in more detail, along with other lessons on professional trading tactics and strategies every day for subscribers of my Idealized Trades Daily Reports.

In order to see these concepts come together in real time, it is important to see and understand as many examples as possible - and learn from experience and repeated examples of these concepts.

Take a moment to see what additional lessons you can learn from the trading activity of the day - so as to improve performance the next time similar confluences set-up in real time in the future.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Price Compression Forecasting Intraday Break Jan 14 SPY

Jan 14, 2010: 1:36 PM CST

I wanted to show a quick chart of the current mid-day SPY (S&P 500 Index) on January 14th to highlight a good example of price compression/consolidation which is often a precursor to a price breakout in one direction or the other, according to the “Range Alternation Principle.”  Let’s take a look at the current intraday chart.


(Click for full-size image)

The main idea is that price alternates between periods of range expansion and range contraction, and consolidations often precede breakouts (and range expansion moves often end in a consolidation period).

Theory aside, let’s take a look at not just the price, but some of the indicators that help us identify price compression periods.

1.  Bollinger Bands (Look for a Compression or visual tightening in the Bands)

2.  Unbound Oscillators (such as the 3/10.  Look for compression in highs and lows)

3.  Intraday TICK (the TICK can show compression in highs and lows)

4.  ADX (Ave. Directional Index - A value under 15 indicates price compression)

5.  Basic Trendlines

These are some of the  helpful tools to use.

Compressions are known as “Value Areas” in Market Profile terms, and some traders thrive on trading breakout moves from such areas.

Keep a close eye on any break of the price above or beneath the Bollingers and trendlines I’ve drawn to play for prior highs ($115.00) or prior support lows ($114.50 and below).

This will serve as a good educational example regardless.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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MultiDay Check on SP500 Market Internals on Jan 6

Jan 6, 2010: 1:34 PM CST

It’s time for another check-up on intraday market internals in the S&P 500!  Market Internals - looking under the hood of the market - can help warn (foreshadow) turns in price in advance.  As such, it is important to keep tabs on key market internals as an intraday trader, or even for a swing trader.

Let’s take a look at the current ‘X-ray’ of the Market Internals for the last few trading days.

We’re seeing the 20min S&P 500 (symbol $INX in TradeStation) with Breadth, TICK, and Volume Difference in the three panels.

I want to call your attention to two periods in the recent past in regard to divergences and reversals.

Market Internals began to form higher lows as price formed lower lows (positive internal divergence) as we ended 2009 (Dec 31).  The lows in internals - Breadth, TICK, and $VOLD - were made on December 30… if you magically erase the sharp sell-off in the final 25 minutes of 2009.

Ignoring that bit of information, we now turn to the present.

Market Internals all formed their recent highs on January 4th, 2010 though price has continued higher on lower highs in each Internal Indicator - that is a negative divergence.

New Market Internal Highs often precede New Index (price) Highs… while non-confirmations or lengthy divergences often precede price reversals.

Given that, price is rising on falling internals, particularly in regard to TICK and Volume Differential Highs (you can see the divergence with a red arrow).

Breadth is forming a lower peak, though the line is rising, thus Breadth is the only major market internal shown above that is … somewhat … confirming higher price highs.

It is a warning to watch price closely for any signs of weakness, and be prepared to act (sell or short) on that weakness.  Watch also for any sudden new highs in market internals to confirm any new price highs.

For reference:

BREADTH:  NYSE Net Advancers on the session minus Net Decliners on the session ($ADD)
TICK:  NYSE TICK - NYSE Stocks “ticking up” at a given moment minus those “ticking down” ($TICK)
VOLUME DIFFERENCE:  Volume Flowing INTO Advancing Stocks on the session minus Volume Flowing INTO Declining Stocks on the session ($VOLD)

With the exception perhaps of the $VOLD, you should be able to replicate this chart in your trading software/platform.

I will be explaining this concept/strategy in more detail along with more specifics in trading tactics in our upcoming extended premium webinar entitled

“Price Principles and Trading Strategies to Gain Your Trading Edge” sponsored by TraderInterviews.com.

For more topic information and to sign-up, visit the “More Information and Registration” page.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Intraday TICK Flush and Dual Divergence Educational Example Jan 5

Jan 5, 2010: 12:25 PM CST

The morning session of January 5th gave us a great chance to see two principles/trade set-ups in motion, which both serve as great educational examples of the “TICK Flush” and “Dual Divergence” situations.  Let’s see them and then define them for reference.


(Click for full-size image)

We’re seeing the SPY 1-min intraday chart (could just as easily be the $SPX Index or the @ES  futures contract) with the 20 and 50 period EMAs shown.

Under that, we see the 3/10 Momentum Oscillator, and in the lower panel, the NYSE TICK (chart created in TradeStation).

Price began making an initial down-move off the open and then suddenly surged to the downside violently, making a new momentum and TICK low.

Under the principle “Momentum Precedes Price,” we would expect new price lows yet to come after a retracement.

However, there is one exception to the rule which creates a potential “snap-back” trade set-up and it is this:  The TICK Flush.

Lesson 1:  TICK FLUSH

A TICK and Price Flush occurs when price and TICK both surge to new lows on the session (condition 1) and then immediately, suddenly, violently reverse in one or two bars to recapture a new high (condition 2).

You can’t forecast/predict TICK Flushes, but what you can do is expect or trade the rally that follows - trading long in this case as price moved to new highs.

Why?  Sellers were dominant over buyers and then all the sudden, price collapsed to the downside and one of two things happened:

1.  Buyers found value at lower levels and began aggressively buying positions
2.  Sellers became over-aggressive and sold all they had, leaving no one left to sell… which creates a vacuum to the upside

Either way, demand suddenly overtook supply, and all those who shorted into the lower levels are now left “holding the bag” and forced to cover (buy to cover), pushing price higher.

The trigger is to buy on a new intraday price high immediately following a sudden “Flush.”

Lesson 2:  DUAL DIVERGENCE

As if it were not enough to discuss the TICK/Price Flush, the market immediately gave us a Dual Divergence, which allows me to discuss that from an educational standpoint.

I’ve discussed this concept many times on the blog, and particularly in my “Idealized Trades” reports to subscribers.

Without going into too much detail, negative divergences form when price (particularly an Index ETF or futures contract) is making higher highs on the trading day, but either the 3/10 Momentum Oscillator is making lower highs on the session (called a “Momentum Divergence“), or the TICK is making lower highs (called a “Market Internal Divergence.”)

When both TICK and a momentum oscillator form negative divergences with price, this is called a “Dual Divergence” and it often forecasts at least a short-term retracement (that is tradeable) or perhaps even a price reversal on the session.  Retracements are - of course - more common than pure price reversals (meaning that point would be the high of the day for the rest of the session).

A trader could short as price began to retrace to the downside after he or she observed the Dual Divergence, and place a stop above the intraday high.  The target would be prior price support zones or some other intraday short-term buy signal… like another positive divergence.

As I captured this image, that’s exactly what happened - price formed a positive momentum divergence at 10:30 CST and began to rally higher.

It’s very important to monitor price as it relates to Market Internals and also a momentum oscillator such as the 3/10 or Rate of Change.

Doing so can create trading opportunities and help you see swings/reversals in price clearly.

As an aside, TICK divergences are mainly used by intraday traders, but swing and position traders can take advantage of the Momentum Divergences signals on higher timeframes such as daily and weekly charts.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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How to Monitor the January Effect in 2010

Jan 4, 2010: 11:03 PM CST

Many traders are throwing around the term “January Effect,” especially as we turn the corner into January 2010.  Some are trying to profit from the “January Effect,” but what is this ‘effect’ and how can we monitor it?  Let’s find out.

According to Wikipedia, the January Effect is defined as a “calendar-related anomaly in the financial market where financial security prices increase in the month of January. This creates an opportunity for investors to buy stock for lower prices before January and sell them after their value increases.

Therefore, the main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.”

The main idea is that investors ‘dump’ shares of small capitalization (cheaper) stocks - which are more volatile - and then when these investors reinvest, they may buy additional small cap stocks, which will be better bargains and also rise faster than less-volatile large cap stocks (Blue Chips).

Thus, small cap stocks tend to ‘outperform’ large cap stocks in January.

Wikipedia and many other sources highlight that this effect is not set in stone, with the statement, “the January effect does not always materialize; for example, small stocks underperformed large stocks in January 1982, 1987, 1989, 1990, and 2008.”

Without comparing individual stocks to each other, how else might we observe whether the “January Effect” is working or not?

Simply take a ‘relative strength’ comparison of the Russell 2000 Index to the Dow Jones or the S&P 500 Index, or for trading purposes, compare the IWM (Russell 2000 ETF) to the SPY or DIA.

Here is what the current chart looks like:

Using StockCharts, type in the following:  IWM:SPY (IWM colon SPY) to generate a relative strength chart.

Take off all indicators and set the chart to a “Line” chart.

You then have is a relative strength chart of the Russell 2000 (small cap index) to the S&P 500 ETF (large cap).

What you have is a fraction.  If the top number is larger, the fraction is larger.  If the bottom number is larger, the fraction is smaller and vice versa.

So, when the relative strength line is RISING, we can say that “The Russell 2000 ETF is outperforming the S&P 500 ETF on a relative basis” which is exactly what we are looking for when discussing the January Effect.

If the relative strength line is FALLING, then the Russell 2000 would be UNDERPERFORMING the SPY, which is not what traders expect when discussing the January Effect.

As of the start of January 2010, one can clearly see that the January Effect may have come early this year - a full month early.

The relative strength line bottomed in late November and rose for the entire month of December.  If this line continues to rise, then we would observe the January Effect in its textbook definition.

Because the expectation of the January Effect is so wide-spread, what we’re likely seeing now is investors buying small-cap stocks in advance - in December - to play AHEAD of the January Effect, so it’s possible to see a reverse January Effect… but let’s not get too far ahead of ourselves.

Use this chart to monitor whether or not the January Effect is taking place in 2010.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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