Nov 2 is a Day of Intraday Divergence Lessons

Nov 2, 2009: 3:22 PM CST

I wanted to follow-up from this morning’s post in highlighting the TICK and Momentum Divergence concept and note that we had two additional examples of the concept – making that three clear examples of the trade set-ups and possible trend reversals that can come when momentum and TICK divergences form intraday.


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Without going into a full explanation (see morning post for the logic of divergences), we see two more examples of the divergence or “non-confirmation” concept.

We had the early morning negative Momentum and TICK divergence precede a price reversal to the downside;

at 12:00 CST / 1:00 EST, we had a lengthy positive divergence in TICK and Momentum precede a reversal back to the upside;

and finally, we had a 2:00 CST negative TICK and momentum divergence precede what appears to be a reversal back to the downside that’s taking shape.

Remember that not all divergences lead to price reversals – just like no pattern in technical analysis is fail-proof – but what we’re looking for is higher probability, lower-risk set-ups, and it is my belief that divergences can offer good trading set-ups, along with helping confirm trend structure.

Under the principle “Momentum Precedes Price,” divergences can precede price reversals or retracements when paired with absolute new price highs or lows.

Again, I teach these concepts in more detail to the members of the Idealized Trades service, but I always want to highlight these examples when crystal clear examples show themselves each day.

Take the time to learn this concept if you have not already.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Nov 2 Intraday TICK and Momentum Divergences Precede Reversal

Nov 2, 2009: 2:09 PM CST

Today’s morning session gave us another excellent example of how TICK (internals) and Momentum divergences can precede intraday reversals… or at a minimum, fail to confirm new price highs on the session which is a warning sign that traders can sometimes miss.  Let’s take a quick look at this example and the lesson it brings.


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The morning session opened strong with positive economic data driving the market higher.  However, as prices continued their pathway higher, market internals and ‘momentum’ were failing to confirm these new intraday highs.

In this case, as can often happen when similar divergences develop, the internals “caught up” with price and we had an intraday price reversal that flipped price movement from positive to negative within the span of a few hours.

The momentum oscillator is the 3/10 Oscillator, but it could just as easily be a Rate of Change or any other momentum oscillator.  The goal is to compare price highs to oscillator highs.  If the oscillator forms a lower swing high when price makes a higher high, then this gives us a negative momentum divergence as seen in the highlighted zone.

The TICK reflects market internals and reflects the difference in stocks “ticking” higher at a given moment vs those “ticking” lower.  TICK highs should logically confirm or go along with new price highs.

If price forms a  new high while the TICK index forms a lower high – as shown above – then this also is a negative divergence and serves as a non-confirmation of the price highs.

Just after 9:00CST, price formed a new high with the TICK index registering 1,073 more stocks “ticking up” than ticking down.  Later, after 9:30 CST (on the 1-min chart), we see an absolute new price high on the session, though the TICK index now registers 930, locking in the negative internal divergence.

Price then reversed from this level, leaving the TICK and Momentum divergence underneath the intraday price highs.

I go deeper into describing this, along with many other set-ups, opportunities, and lessons in each day’s “Idealized Trades” Daily Report, which is both an educational service to teach you specific intraday trading insights via examining multiple examples of a concept, and a “what might we look to do tomorrow?” service in terms of levels to watch and structural opportunities of which to be aware.  Check out the page for more information.

Always compare market internals with price for a deeper, more insightful picture of what’s really happening beyond the flashing prices of the intraday charts.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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Color Daily EURUSD Forex Chart Shows Lengthy Divergences

Nov 1, 2009: 4:42 PM CST

Instead of looking at the Euro Index, let’s take a look at the Euro – US Dollar FOREX Pair – EURUSD – and see the current ‘color chart’ along with two sets of momentum divergences and an Elliott Wave count.  Sound complex?  Let’s look at it step by step.


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We see a daily graph of the EURUSD starting with mid-2008 so we can see the lengthy positive momentum divergence through early 2009 that preceded the rally phase that has taken us to the current levels of 1.5000.

Since then, a lengthy negative momentum divergence has formed, which serves as a non-confirmation of the angular price rise off the early 2009 lows.

The oscillator is a color version of the 3/10 Oscillator I use (information via the link).

The oscillator formed a momentum peak in December 2008, but to compare price to the oscillator, we’ll use the March 2009 peak so we can follow along with the divergence which also corresponds with the stock market rise off the March 2009 lows.

In addition, I’m showing a possible 5-wave fractal Elliott Wave count, in which the final fractal 5th wave itself is subdivided into a 5-wave progression that has reached its peak at one of the lowest positive readings in the momentum oscillator.

Though it’s difficult to see, the 50 day EMA rests at 1.04656, a level to watch for support… or an acceleration of price to the downside if this level fails to hold here.

What remains is a battle between the “simple” form of technical analysis – trend continuation which is bullish – vs the more ‘advanced’ concepts of Elliott Wave and lengthy negative momentum divergences (bearish).

For those who don’t trade or monitor FOREX, you can watch the Euro Index under symbol $XEU in StockCharts.com or most other charting platforms.

For more analysis on the US Dollar Index and broader Cross-Markets, consider subscribing to our Weekly Intermarket Technical Analysis service.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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May 2008: The Last Time We Saw Major Breadth Divergences Like This

Oct 30, 2009: 6:06 PM CST

This morning, I wrote about the lengthy “Market Internal” non-confirmations or glaring negative divergences that are creeping in to undermine the current stock market rally.

Let’s step back in time to May 2008 – the peak of a counter-trend rally and the last time we saw such glaring non-confirmations with market internals and price… just before a major reversal.

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Please refer back to the earlier post “Daily Market Internals Now Failing to Confirm Market Rally” for a definition of the two lower-panel indexes/indicators.

The main idea is that the “Breadth” or “Advancers minus Decliners” is a way to look ‘underneath the hood’ of the market to see the true strength – or weakness – of a rally (or retracement) in price.

At the beginning of the move, the internals confirm price by spiking or concentrating at higher absolute levels.  As the rally gets “old” or “long in the tooth” (nearing an end), then the Internals begin to form negative divergences, and reverse direction ahead of the price.

Thus, internals can be referenced as a type of leading indicator.

Price rallied off the March 2008 lows with stronger Breadth and Volume readings (difference in “Up-Volume minus “Down-Volume”) and the rally continued.

In May, it became clear that the internals were turning lower while price was moving higher… like a car sputtering forward on an empty tank of gas driving up a hill.  Once the gas runs out… the car will slow to a stop and begin rolling backwards down the hill.

We know that price continued much lower not only in the short term but in the long term after this chart was captured.

If history is any guide, we could be looking at the same car (stock market) rolling up the same hill on fumes… about to reverse course.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Daily Market Internals Now Failing to Confirm Rally from March Lows

Oct 30, 2009: 11:46 AM CST

Let’s take a look at the full S&P 500 rally from the March 2009 lows and take a special look at daily readings of Breadth and Comparative Volume to see that Internals surged higher and confirmed the initial rally but lately in an ‘about-face,’ have been failing to confirm the new 2009 price highs.  Let’s take an objective look at price and underlying internals.

Click for full-size image.

The two lower panel indicators are as follows:

Panel 1:  $ADD – The Advance – Decline Difference (subtracting the daily NYSE Advancing stocks from declining stocks)

We can watch the “Breadth” or Advance/Decline line intraday, or we can monitor it like this, looking at the values on a closing basis for the day.  For example, a value of 2,000 means 2,000 MORE stocks advanced on the session than declined.

This is classic “breadth” which shows the relationship of stocks that are positive on a particular day vs those that are negative.  Higher values – of course – are indicative of a strong rally.

Panel 2:  $VOLD- The Up-Volume minus Down-Volume (comparing VOLUME of advancing stocks to VOLUME of declining stocks)

Not only are we interested in “Breadth,” but we also want to know the “Volume” of the breadth, which generally go hand-in-hand in terms of confirming market rallies.  This is truly looking ‘under the market’s hood’ for insights on depth of participation or activity.

Insights

As the market rallied strongly off the March 2009 lows, we saw sustained and high values both in the Breadth and Volume readings, though both formed slight negative divergences as price moved into the contraction/consolidation (correction) phase of June to July.

This was the infamous “failed Head and Shoulders” pattern.

Upon the July lows and ‘breaking’ to new highs from a sideways correction, we again saw new price highs confirmed with spikes in both Breadth and Volume differences – exactly what you’d expect to see if forecasting a continuation of the up-trend rally.

Pull the perspective back and look at the larger picture of the entirety of the rally so far.

We see strong internal readings at the start and the lengthy declining red arrow – or declining highs in both Breadth and Volume – as price has continued to claw its way to new highs into October.

If we look at the current highs, we see that Breadth averaged around a positive 1,500 difference, which when we compare it to the start of the rally, we see the difference averaged over 2,000.

This lengthy negative divergence is also present in the daily volume ‘breadth’ difference.

Finally, on the most recent pullback or retracement, we are seeing the largest concentration of red bars – or negative differentials – of the whole rally, with each new day making new relative (but not absolute) lows.

Conclusion

Negative ‘internal’ divergences with price over such a lengthy time period and a lengthy rally do not spell positive news for buyers/bulls.  If anything, it appears to confirm what others are saying that the “market is running on fumes.”

It’s one thing to look at price and another to look ‘under’ price at the internals.

Higher/supportive internals are indicitive of continuation of a trend, particularly in the early stages.

Divergences and antagonistic/non-confirming internals… are indicative of a price reversal brewing.

Continue watching this with caution – for the uptrend to continue, we need to see internals improve.

Otherwise, prepare for a correction or falling prices ahead as the internals ‘catch up’ with price- like a rot within an otherwise strong-looking tree.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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