Per recent reader request, here is a brief swing chart or divergence look at the Platinum and Oil charts:
Jonathan correctly identified a developing momentum divergence forming on the daily futures chart for Platinum.
The last ’swing high’ took place at $1,400 and then now we made new price highs at $1,475 and are now retracing nicely to the rising 20 period exponential moving average.
When we spot a divergence in price (with the blue momentum oscillator), then odds favor a resolution of the divergence in favor of the oscillator, using the principle “Momentum Leads Price Action.” The initial target would be a retracement to the 20 period moving average as the first line of â€“ in this case â€“ support. Entering a momentum divergence trade is often psychologically difficult, and you need to utilize absolute and close stops because the trade is â€“ by nature â€“ a counter-trend trade.
Price may be so strong in this case that it actually fails to retrace to the EMA, but more than not, momentum divergences are resolved and terminated at or through that boundary.
Divergences do NOT signal trend reversals, but only that â€“ in this case â€“ buyers are ‘losing steam’ as they try to push price higher. Momentum divergences are often the result of the prior swing being less forceful than previous price swings.
For those who follow concepts set forth by Linda Raschke, a “Holy Grail Buy” may be setting up in this contract because the lowest pane indicator is a standard ADX (Average Directional Index) that is set to trigger red when it crosses above the 30 threshold and trigger blue when it drops below 15. Raschke teaches that the “Holy Grail” concept occurs when the ADX increases above 30 to signal a strong trend and calls out a ‘buy’ (entry) when price retraces to its rising 20 period moving average. Technically, price has yet to do so, but traders can be on alert for it to do so should it test the moving average. Stops would go comfortably beneath the moving average.
You can recreate the ADX or moving average indicator with any popular charting software.
As a bonus, let’s look at the price of Crude Oil (futures), which has been featured frequently in the media these last few days:
I didn’t draw in the ‘divergence,’ but I think it’s actually clearer to see than Platinum or Gold (on the daily chart).
I previously mentioned the divergence setting up and we now have price correcting down off its highs in a similar manner to Platinum. Again, any pullback to the rising 20 period MA will set up the famous “Grail Buy” trade because the ADX currently stands at 35 (not shown on the chart).
Until price takes out the swing low at $85 and also makes a lower high, we still have a major uptrend in the price of oil, which can be rather bearish for the overall stock market.
Elliott Wave theorists, take note. We may have a complete three-impulse price push completing itself with Crude Oil. The chart would be a near perfect Elliott Wave pattern, except that the 1st wave was the most dynamic wave, instead of the 3rd.
Nevertheless, the chart provides evidence to the ’swing theory’ of the market â€“ that of price moves in swings to reach balance.
We will definitely be watching other commodity prices for further signs of inflation.
With inflationary pressures sweeping most commodities, can the Federal Reserve ‘afford’ to Cut Rates this Wednesday?