Multiple Momentum Divergences in SHLD
Readers, I know I discuss momentum divergences very frequently but they work (are effective) on so many levels.
Primarily, they set up trade ideas, and I take many of my swing trades based on momentum divergences. They work better than average for day-trading but not as well as swing trades off daily charts (in my opinion).
Second, they can provide warning signs for a trade you are managing – momentum divergences can be an early warning sign that the profit potential for your trade has eroded and price is likely to reverse on you.
Third, they can give you basic idea of the market structure in terms of supply and demand.
View this chart of Sears Holding (SHLD) and focus only on the highlighted momentum divergences. Click to view the full-size image.
Also, ignore the most recent action (the severe gap down through the moving average). We had a strong momentum divergence forming that may have kept longs out of the recent slaughter if they heeded the signal of declining momentum.
Corey,
From your experience, what charting tool have you liked?
Thanks, Joe
Hi, Joe.
I have tried as many tools and tried to understand as much as I could (one time, I overlaid 20 indicators and sought perfect alignment… it never happened). Over the years, I have relaxed a bit and stopped ‘trying to be perfect’ and tried to limit my indicators to what work in most conditions in most time frames.
What this comes down to is a basic theorem on what moves price and likely turning points or zones of continuation. Seek points where the bulls or bears will be disappointed and once a zone is breached, where price will continue.
For me, I study momentum and divergences, along with support and resistance. Indicators confirm these points.
I use the 20, 50, and 200 period moving average, bollinger bands or keltner channels, and a modified 3,10,16 MACD oscillator (momentum and divergence readings).
I study pure price swings and look at the overall trend structure. Price now is more important to me than indicators – in terms of swings and duration and velocity (momentum).
Ultimately, it comes down to what you feel is comfortable. Figure out what you want to identify, figure out indicators that reveal what you want to study, and don’t alter them much (or at all) when you get used to them.
Feel free to share what indicators you use or what you feel is important to look for in price movement.
Thanks!
Corey,
I try to add sector strenght to my trading plan. It’s a bit of a puzzle right now. What do you think of this following approach; is this similar to what you’re doing?
Take the relative strenght of a sector vs. the S&P500 or Nasdaq, and then take a 20 and 50 day simple moving averages of the relative strenght. Buy when 20DMV crosses 50DMA on upnside, sell at the opposite?
Thanks, Joe
Joe:
Sounds like a viable approach, especially when comparing to the S&P, but realize that sometimes you will have situations where the S&P is falling and your sector is falling also, but your sector is falling less than the S&P and so it will be showing relative strength, even though it is declining.
In terms of using moving averages that way, MAs are always going to lag price action and give late entry signals. Why not use a trendline approach and draw simple trendlines and use trendline violations to signal entry/exit, in conjunction with other references/sentiment indicators?
Relative strength charts can provide early turning points, provided the charts are measuring proper relationships.
My advice is be wary of using moving averages as a complete trading (entry exit) system because of the lag factor.