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

5 Comments

5 Responses to “Intraday TICK Flush and Dual Divergence Educational Example Jan 5”

  1. BuilderBob Says:

    Cory, do you think that the quick snap back had anything added to it by being a MATD ?
    (morning after trend day)

  2. Corey Rosenbloom, CMT Says:

    Hey Bob,

    Not necessarily – the downward action after a trend day, maybe, but the spike was something else.

    The TICK flush was likely a result of a snap-decision to sell stocks when the Pending Home Sales number was released at 10:00EST/9:00CST. Traders sold shares in a knee-jerk reaction (the number was worse than expected) and then those who shorted were popped out as the market rallied higher – buyers bought on the bad news.

  3. Kevin Says:

    Great post Corey! I'll keep an eye out for those TICK flushes.

  4. Rajandran Says:

    Great Post Corey, Thanks for Educating us!

  5. Rajandran Says:

    Great Post Corey, Thanks for Educating us!