Quick Lesson in Intraday Dual Divergences SPY Dec 16

Dec 16, 2010: 11:51 AM CST

I love highlighting divergences in posts – they’re also enjoyable to trade when you get used to seeing them at key turning points in the market, particularly at a higher timeframe key level.

Let’s learn from a recent example from this morning’s hard push to new lows… that was met with a sharp positive TICK and Momentum divergence and note the powerful rally that erupted from the dual divergence at higher timeframe support.

SPY 5-min:

What we’re seeing above is my custom TradeStation display of the SPY ETF – SP500 proxy.  Above is the 20 and 50 EMAs (green and blue) and the 200 SMA (hit as a short-term target).

Beyond that is the standard Bollinger Bands and the custom 3/10 Oscillator (MACD with SMAs instead of EMAs – periods 3 and 10).  And of course the NYSE TICK.

Ok – so here’s the main lesson.  Markets often turn – and thus set up low-risk (tight stop) / high probability trades when intraday dual divergences form – like in these two examples.

To locate divergences in real-time, watch price highs relative to indicator and TICK highs – if price makes a new high but the indicators DO NOT, then that is a divergence.

The first example was just before 10:00am CST on December 15th with a quick move up to the higher Bollinger Band as momentum and TICK FAILED to confirm the new price high just under $125.

Round-Numbers like $125 are often reference points that set-up little intraday trades if divergences form into them – like this.

The trade entry/execution here was on the price break of the rising trendline – or more specifically – the price breakdown through the 20 EMA at $124.70 (10:10am).  The stop goes above $125 and the minimum target is a retest of the prior  low from yesterday’s closing level – which was hit a few hours later.

But I really wanted to call your attention to what happened this morning on the sharp bounce off $124.

I indicated that $124 would likely be a key confluence support level in last night’s report to members, as seen in this chart:

Without going into detail (that’s what the report is for!), the main idea for this post/example is that $124 was a potential confluence support level that could come into play on the next session (prior price highs and the 50 EMA on hourly frame).

Of course, as we see above, it did, sparking a powerful rally.

Now glance back at the 5-min chart of today.

As price pushed to the $124 dual potential support target level, a clear positive TICK and momentum divergence formed with the final shove into this level at 9:00am CST.

At a minimum – as is the case with initial divergences – this is a “Take Profits” signal if short, and an aggressive counter-trade reversal (or scalp) long on a move off support.  The stop goes under the $124 level.

The official ‘breakout’ entry was on the power-move above the declining trendline (not shown) or more importantly the falling 50 EMA (5-min) at $124.20.

As of this writing, a 50 cent (roughly 5 point move in the @ES futures) erupted from the breakout at $124.20, and a 70 cent move launched off $124 (as much as we want to, you can’t buy the bottom tick but only as price comes back up off support).

These are the kind of lessons and examples I describe each day for members of the Idealized Trades reports, which include pertinent lessons on trade set-ups for the day and then commentary/analysis on what’s important to know from the higher timeframes (30, 60, and daily charts) going into tomorrow – along with any lighthearted commentary and additional specific lessons I throw in each day.

Main lesson here – take into account key levels or structure on the higher timeframe FIRST.

THEN, as price interacts with those levels intraday, see if you can locate any obvious divergences in momentum or internals (better if you locate both) and then look for entry into the potential trade set-up/opportunity that arises from the – let’s say – positive divergence into support on the higher timeframe.

I’ll be discussing more about these type of set-ups in a presentation on “Trade Execution Tactics” at the New York Trader’s Expo – February 20 – 23 (I hope you can join us all there!).

Corey Rosenbloom, CMT
Afraid to Trade.com

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

7 Comments

7 Responses to “Quick Lesson in Intraday Dual Divergences SPY Dec 16”

  1. Roberto Says:

    Great post – again.

  2. DYNAMO Says:

    I watched that with my chart overlaying SPX in candles and Tick in bars in same chart
    http://screencast.com/t/kaY93y

  3. Dominick Says:

    Hello Corey. One quick question, I see you use the sma instead of an ema in the 3/10. Any reason for this? Any advantage or disadvatage? Great post. I love the intraday stuff. Thanks.

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  5. Corey Rosenbloom, CMT Says:

    Dominick,

    This is as close as it gets to the 3/10 Oscillator as taught by Linda Raschke of LBR Group – the indicator uses SMAs but that's not possible in StockCharts or other programs, so to compromise, we change the settings to 3, 10, 16. SMAs tend to be smoother than the EMAs in terms of the 3 and 10 period averages.

  6. Corey Rosenbloom, CMT Says:

    Thanks Roberto!

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