Intraday Divergences Preceding Reversal

Feb 24, 2009: 4:29 PM CST

Today’s DIA action featured a lengthy positive momentum divergence heading into the morning’s open which wound up being a valid pattern that gave ample warning of its developing structure.  Let’s view it both on the 15 and 5 minute intraday charts.

DIA 15-min:

A quick take at the structure shows a “Three Push” pattern completed on Friday which preceded the large spike-up into EMA resistance which failed to garner further upside, as the indexes broke to new lows.  Good example there.

We had a failed bear flag yesterday (in that it did not meet its measured move downside target) though price formed a positive momentum divergence going into this morning’s open which preceded the price reversal (counter-swing) back to the upside.

Notice that the end-of-day volume was a little lackluster, and could be a non-confirmation of today’s rally.

DIA 5-min:

The 5-minute timeframe offered interesting opportunities today.

We began the day with a gap-fade (price gapped then ran into EMA resistance, setting up an excellent short-sale trade back to yesterday’s close) which got its target literally to the penny before finding support (on a triple swing positive momentum divergence, just after a “Three Push” pattern completed into yesterday’s close).  The doji (dragonfly) at support offered perhaps the best trading opportunity of the day, second only to the Cradle (confluence) Buy just after 1:00 EST.

Price rose to an intraday high at 11:00am, forming a new momentum high which suggested that perhaps an actual high was yet to come – keep in mind the structure was still officially in a downtrend, though the structure was shifting at this point.

Price formed a bit of a flag-style retracement down beneath the EMAs (the 20 did not cross above the 50 at this time so the structure was still bearish and price was still in a downtrend) though when price broke above the resistance line, it also broke back above the 20 & 50 EMAs and pulled back to confluence support (The “Cradle Trade” as I so call it) which set-up a very high probability trade (with a stop just below the prior swing low at $71.40).

As you can see, others caught on to this trade idea (or at least demand overcame supply at this critical area… perhaps in part from shorts covering) and we had a massive rally to the upside which, as we took out the 11:00am swing high, officially reversed the trend of the 5-min chart to up.

The next high probability trade set-up came as we retraced back to the rising 20 EMA at 3:00, forming a type of bull flag (that fell just shy of its target).

Now, we have a new price high on a negative momentum divergence, and a weaker than expected volume reading (volume is supposed to increase at the end of the day due to the “Volume Smile” effect).  This, along with the negative divergence, is a technical non-confirmation in development.  Let’s see if it plays out.

There were lots of interesting things to take away from today’s trading session.  Annotate your own chart in your own style to see what else you can find.

Corey Rosenbloom
Afraid to Trade.com

17 Comments

17 Responses to “Intraday Divergences Preceding Reversal”

  1. Gawed Says:

    hey man! i was out of town and had not seen your blog in a while!
    but i’m back and as usual it’s great and simple to read you!

  2. Gawed Says:

    ooopps my past comment got posted short by mistake,

    i also meant to ask if you have any posts regarding that “three push” movement you talk about, what does it mean?.

    how are you? getting really interested in your coaching 🙂

  3. maximus Says:

    Corey

    You helped with today’s call–so I thought I would thank you and post about it–if you don’t want my blog mentioned here please remove. Thanks again. Maximus

    not a stock picker but couldn’t resist this one–and it worked!

    Julius Caesar called todays bounce in the stock market (really, he did).
    who knows what tomorrow brings–

    http://4best4worst.wordpress.com/

    love your blog –read it regularly (it will be a “best” on my blog soon) — hope you like mine….

    maximus

  4. optionstrader Says:

    I see the negative divergence on 5 min chart but not on the 15 min chart. How would one decide what to go with? Thanks in advance.

  5. bond trader Says:

    i thot divergences are weighted less in trend-down days..

  6. optionstrader Says:

    Also on your 5 min chart the red volume bars are much bigger than on Prophet charts. They are less than half the size on your chart.

  7. Sen Says:

    Great post. Thank you.

    what is your bottom momentum indicator?

  8. BJ Says:

    Did u get to read BOB Precheter’s comments? He is talking about a scary bounce and is asking shorts to cover. He does say that he is covering early and says this not a final bottom. Im still scratching my head why he is doing this. Very amibavelent. Can u throw some light please.

  9. DaveB Says:

    Look at the 30-min: could this afternoons rally be a bear flag into 50ema resistance?

    I’m not betting on it but it’s something to consider nonetheless. I’d consider this a more likely scenario if this decline wasn’t already so extended.

  10. Corey Rosenbloom Says:

    Hey Gawed! Welcome back! I meant to Twitter you a welcome back so it’s good to see you. Hope all is well!

  11. Corey Rosenbloom Says:

    Gawed,

    I did a prelim page on the 3-Push Pattern:
    http://tinyurl.com/cu4482

  12. Corey Rosenbloom Says:

    Maximus,

    Thank you for the comment! Ironically, I had visited your site earlier this morning so that’s neat to hear from you today! Small world. Would be honored to be featured.

  13. Corey Rosenbloom Says:

    OT – good calls there.

    It depends on your risk-tolerance and preference/timeframe. I typically trade off the 5-min so I’m more likely to miss higher timeframe signals, but a divergence is of short term forecastability anyway.

    I think I snapped the picture with one or two minutes left in the trading day and probably prematurely didn’t get all the volume readings right at the close. That’s probably where the discrepancy comes in.

  14. Corey Rosenbloom Says:

    BT,

    One does weight divergences/indicators less on trend days but it’s not a 100% thing (nothing is in trading). The Three Push at the end of the day wound up ‘working,’ though I would suggest it had a lower probability of doing so than had the day been a normal style day instead of opening at one end and closing at the other.

  15. Corey Rosenbloom Says:

    It’s an adaptation of the classic 3/10 Oscillator:

    http://blog.afraidtotrade.com/how-do-i-create-the-310-oscillator/

  16. Corey Rosenbloom Says:

    BJ,

    I have 100 things I’d love to say about that topic but I’ll keep them off the record.

    All I’ll say is that Prechter is known for being early.

    To his credit this time, the Wave structure is coming to an end and – technically – could be ending with a 5th wave truncation (we got our target of a test of the November lows). Looks like we’re in fractal 4 of 5 and missing the final fractal swing down but who am I to doubt Mr. Prechter?

  17. Corey Rosenbloom Says:

    Dave,

    If we’re going to do a bear flag down, here’s the place to do it (in terms of 15 and 30 min chart).

    I’d call it more of the AB = CD Measured Move pattern instead of a classic flag though – the ‘pole’ wasn’t steep enough.