Lesson in Playing Intraday SPY Reversals with Two Timeframes and Divergences

Jan 6, 2011: 3:59 PM CST

I think it’s important to document interesting examples of trading concepts played out during the day, as it serves both as an educational reference and deepens our knowledge about these concepts, which helps us to trade better the next time a similar set-up or opportunity unfolds in real time.

A great educational example – and good followthrough – formed on January 4th intraday reversal play that was telegraphed WELL in advance by various factors – some of which I wanted to show you so you can use them as a reference.

They include:

Higher Timeframe Dual Support played out on the intraday frame, and then the intraday positive dual divergences that formed that preceded the official “reversal” trade entry trigger for a great intraday opportunity that actually carried into the next session.

Here – let’s take it step-by-step and learn from this example:

I want to cut right to the heart of the lesson and call your attention to the DUAL SUPPORT line at the $126.20 level in the SPY.

That’s because the level was a prior resistance point at the end of December (shown above) – as old resistance sometimes becomes FUTURE support as price tests this ‘polarity’ level again.

Beyond that, we have the 61.8% Fibonacci Retracement – drawn from December 31’st swing low near $125.30 to January 1st’s $127.60 level.  The 61.8% grid level came in – surprise – at the same level as the prior price high at $126.20.

As price pulls back, that’s a natural target to play for when shorting intraday, and a natural place where the market MIGHT turn-around and find support if the swing continues down to that level.

So – CONCEPT 1: $126.20 was a natural dual support target to play for short, and see if a reversal formed intraday.

And on January 4th – that’s exactly what happened – price fell off the open down to the $126.20 target level, so now the game changed to:

“WILL support at $126.20 hold?”

More importantly with that target in mind, you should be watching the intraday structure in real time to see if there are any clues – such as divergences – that lead you to believe one way or the other that support will hold… or break.

It turns out there was a powerful clue that then set-up a trade entry to PLAY for the reversal and bounce up off support.

It’s one of my favorite concepts:  Dual Intraday Divergences:

(Click for full-size image)

Now let’s take this one step at a time – focusing specifically on the dual divergences at 11:45am CST at the $126.20 level we referenced above from the 5-min (and really any higher) timeframe.

I discuss this concept frequently, but it’s always fun to look at new examples and trade them.

As price fell through the morning session, $126.20 was the higher timeframe dual price and Fibonacci target.  The market was an intraday short until then.

However, as price tested this level at 11:30am, it became clear to those watching that a triple positive TICK divergence – along with a positive momentum divergence in the 3/10 oscillator – formed at this key price level.

Remember, we watch price FIRST and then look to indicators to confirm or disconfirm what’s happening in price.  Divergences are non-confirmation signals of a move in progress, and suggest a retracement or perhaps reversal is perhaps yet to form.

Look closely at the vertical highlighted line to see the inner-workings of this Dual TICK and Momentum divergence.

At a minimum, that’s a “cover your short” position and then see if a corresponding price breakout signal forms for you to play a reversal/long here.  It did.

After the initial bounce of $126.20, price broke a rising trendline at $126.30, then – perhaps more importantly – it shattered through the 20 and 50 EMAs on the 1-min chart where I labeled it.

The official trigger happened at $126.40 for the entry to play long for an intraday trend reversal – which was made all the more better by the higher timeframe dual support at $126.20.

Immediately after the breakthrough, and actually just before it, the TICK formed new intraday highs in what I like to call a “Kick-off” or “Wyckoff Sign of Strength” signal that further increases the odds of a trend reversal.

It’s important to know these concepts – divergences and TICK Kick-offs – in advance (study them) so you can recognize them in real time and thus play them appropriately when they develop.

Ok – so in summary (in chronological order):

1.  Dual Price and Fibonacci Support at $126.20

2.  Test of $126.20 intraday as clear DUAL positive momentum and TICK divergences form

3.  Price BREAKTHROUGH of falling trendline and 1-min EMAs

4.  “Kick-off” Signal in TICK via new TICK highs as price came UP off the low

Taken together, the ‘weight of the evidence’ favors short-term reversal, allowing you to trade confidently with the evidence from the charts.

From here, price went back up to form a new high at $127.80, as of January 6th when I’m writing this post.

For reference for those of us who are futures traders, here’s the same 1-min chart above of the @ES futures contract:

These are the kinds of lessons I document/teach each day in the Idealized Trades reports for members – archives go back to April 2009.

Remember, the more we learn from actual examples – and particular if we keep our own notes and observations – the more confident and better prepared we will be to capitalize on these opportunities when they repeat – and they will – in the future.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Order your copy of The Complete Trading Course (Wiley Finance) now available.


4 Comments

4 Responses to “Lesson in Playing Intraday SPY Reversals with Two Timeframes and Divergences”

  1. marketsniper Says:

    Outstanding, Corey! Do you know , as of yet, whether your going to be at the Las Vegas Money show in May?

  2. Corey Rosenbloom, CMT Says:

    Thanks Marketsniper!

    I'll be speaking at the New York Expo in February and most likely the Dallas Expo (not in Los Angeles this year) in June. I generally speak at the Traders Expos rather than the Money Shows though both are a good resource to attend.

  3. ibiza2000 Says:

    I guess I wasn't the only one who caught that trade. It was a profitable way to “kick off” 2011! Ha!

  4. Dominick Says:

    Great post Corey, I just ordered your book and I am looking forward to reading it.