Intraday Rounded Reversal and Divergences Example Feb 22

Feb 22, 2010: 5:43 PM CST

The market gave us another classic example of the importance of monitoring price along with something else, such as a market internal or key indicator.

In this case – February 22 – I wanted to show today’s lesson of how a “Rounded Reversal” pattern formed alongside positive and negative TICK divergences, and how this set-up some great opportunities… so that you’ll be better prepared the next time a similar set-up occurs.

First, we’re looking only at price above (SPY 3-min chart for clarity in structure).  Next, we’re comparing the NYSE TICK with price in the bottom panel to compare highs and lows (and see if the TICK aligns… if not, we’re looking at a divergence).

I wanted to call your attention to the two key points on the chart, the first being at 9:00am CST this morning, with price plunging to a new price low under $110.90… but the TICK not forming a new indicator low.

That is a positive divergence, and it argues in favor of at least an upside retracement ahead if not a full reversal… which is what happened.

It was possible to trade or at least be biased long (exiting any short-sale position with a profit) when we started to see strength or the rally form off the key positive divergence.

The rounded reversal pattern was not clear at this time (it was more of a downward sloping trendline), but by the end of the session, the Rounded Reversal ‘arc’ pattern was clear, and the end-of-day negative divergence gave an exit signal and ‘flip/reverse’ short-sell signal for those who were aware of it… which was confirmed by a trendline break at the $111.40 price.

Traders love to draw trendlines (I do too) but realize that sometimes, it’s best to draw ‘arc’ trendlines instead of the standard flat trendlines.

Do whatever it takes to capture more price points when drawing trendlines – and as this example shows, sometimes that means drawing an arc.

The negative TICK divergence combined with the arc trendline breakdown at 2:30 CST gave us a quick short-sale entry… and apparently traders piled into this move!

Seriously though – the market often telegraphs its next move, or at least tips its hand sometimes just a few minutes ahead of a big move.

I wrote about that in a prior post:

SPY Double Divergence Reversal Day

“A Lesson Inside February 5th’s Failed Bear Flag.”

For full descriptions and more lessons like this for intraday traders – combined with levels/opportunities to watch for the next trading day – become a member to my Idealized Trades Reports service, where I use each day’s activity as a real-world teaching exercise which has now created a database of concepts, set-ups, and type of day structures.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

2 Comments

2 Responses to “Intraday Rounded Reversal and Divergences Example Feb 22”

  1. Dominick Says:

    Hello Corey. Hope you enjoyed your trip to NYC. This is a little off topic but have you ever toyed around with tick charts instead of the time charts? Can you provide a quick comment or point me in the direction of a good learning resource. I have been playing around with them as of late and they sometimes seem to give a good signal divergence wise.
    Thanks.

  2. Dominick Says:

    Hello Corey. Hope you enjoyed your trip to NYC. This is a little off topic but have you ever toyed around with tick charts instead of the time charts? Can you provide a quick comment or point me in the direction of a good learning resource. I have been playing around with them as of late and they sometimes seem to give a good signal divergence wise.
    Thanks.