Quick Dual Divergence Intraday Trading Lesson on January 13

Jan 13, 2012: 3:20 PM CST

Dual intraday divergences can be very helpful in pinpointing short-term turns (reversal) in price which create ideal low-risk, high probability trade set-ups for the intraday index futures or ETF trader.

Let’s highlight a good example reference from today’s action on January 13th using the @ES Futures contract as our proxy.

Click for full-size image.

Without delving into too much detail of reversal logic, let’s just focus our attention on the price action along with two supporting indicators:

  • The 3/10 MACD Oscillator – a Momentum Oscillator ( MACD with custom settings 3 and 10)
  • The NYSE TICK – a Market Internal indicator

You could substitute any unbound momentum-style oscillator such as Rate of Change for your momentum indicator to get a similar effect.

What we’re identifying are divergences:

  • A Positive Divergence occurs when price is declining (making lower lows) yet the oscillator forms higher lows
  • A Negative Divergence similarly develops when price rises yet the oscillator forms lower highs.

Price can form single divergences or Multi-Swing (multiple) divergences.

Logically, the more divergences that develop within a swing, the greater the odds of the price reversing.

That’s the basis of using oscillator for confirmation/non-confirmation.

Today’s session gave us a cluster of both positive and negative DUAL divergences.

Dual Divergences occur when both the Momentum (price-based) and TICK (Market Internal) indicators form corresponding divergences relative to the price swing in motion.

The first major negative dual divergence occurred near 11:00am CST which was then triggered – for a potential trade entry – on the signal from price breaking either the rising trendline or preferably the horizontal trendline near 1,281.  The stop would go slightly above the prior swing high in the event the up-trend continued.

Similarly, there were two positive divergence situations near 11:40am and 12:45pm CST – the first divergence produced only a very small swing to the upside while the second opportunity did result in a swing reversal – and break of a sideways rectangle pattern – for larger swing higher.

Each trader must decide whether to use aggressive (entering early and using a wider relative stop to play for a larger target) or conservative (entering only after proof of a trendline break while using tighter stops and smaller targets) trading tactics when building trades out of this type of swing reversal logic.

Generally, the trade is exited either into a fixed target or on a corresponding opposite divergence… which may trigger a new trade.

Divergence situations like this can be used as trade exit signals (perhaps from another set-up), not just entry signals.

I’ll cover this topic, and incorporate divergence work into multiple timeframe analysis, at my presentation at the New York Traders Expo.

This is also the type of explanations and lessons we cover each day using the intraday timeframes to spot ideal trades, discuss what components created the set-up, how to manage it, and specific lessons to use for future opportunities in the Idealized Trades membership reports.

Always take time to study price and indicator behavior to learn additional insights so that you’ll recognize similar situations easier and be prepared to act to trade the classic set-ups.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

2 Comments

2 Responses to “Quick Dual Divergence Intraday Trading Lesson on January 13”

  1. Kirk Nathaniel - Option Alpha Says:

    We are starting to see the same divergence on the daily charts currently. Do you ever use the CCI indicator at all Corey? I've had good success with it as a “confirmation” type signal after some duel divergence like you mentioned above.

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