Short Scalp Trade Today – QQQQ: Momentum Divergence

Mar 5, 2007: 9:28 PM CST

I am not in the habit of posting trades I have taken, but I will be posting trades that highlight general principles, or high probability trades (whether they worked or didn’t work for me). I will be posting more about my style, which is between scalping and day-trading for small profits and taking only high-probability, tested set-ups that fit my style and (conservative) risk tolerance.

I did want to highlight a momentum divergence set-up (scalp) I took today in the QQQQ’s. First of all, I suspected the market action to be weak today and was surprised by the gap-fade up in the morning (well, surprised isn’t the operative word – the first play following a gap is to fade the gap back to the open price and then the second play is to play the direction of the gap after it has been closed). The market overshot its gap close and I was looking to short the market today and was having difficulty finding a set-up to do so. I decided to enter a small “probe” position when I saw what I suspected to be a “double top” combined with a possible momentum divergence (will be discussing in a later post) AND pivot level resistance (R1). I decided there would be a very strong probability of lower prices. Attached is the chart moved back to the entry time:

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Logic: Momentum Divergence, Stochastic Sell, Resistance at R1 Pivot

Entry: Short as close to $42.70 as possible (filled at $42.65).

Stop: Above most recent swing high and resistance at $42.75 to $42.80 (depending on how risk-tolerant you are).

Target: Most recent swing low at $43.40 (this is the highest probability small target)

(Chart facts: March 5th, 10:30 central, 5 minute chart, TradeStation).

Remember the highest probability arises from playing the market one swing at a time.

Risk/Reward: 5 cents or 10 cents risk to 30 cents reward (either 1:6 or 1:3, depending on risk tolerance).

The second chart reveals the closing of the trade.

The divergence occurs with the momentum oscillator at the bottom of the chart. As price swings up to retest the most current swing high ($42.70), the oscillator clearly makes a lower high, signaling “Loss of momentum.”

Remember, Momentum Precedes Price. You could have entered this trade on this axiom alone, yet the confirmation zones strengthen your probabilities and your confidence going in to the trade.

Trading is about putting the odds in your favor and playing for small, frequent gains. Even though this may not be an ‘exciting’ set-up, it puts the edge in your favor through multiple points of confirmation.

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We acheived our target of the most recent swing low at $42.40.

Trade closed for $0.30 profit (actually, 24 cents for me I covered and was filled at my profit target limit at $42.41). That “scalp” lasted about 40 minutes.

This highlights mainly how I trade. I apply support/resistance parameters, swing highs and lows, and momentum divergences that provide clear profit and stop-loss targets. I play for small targets and manage my risk carefully (actually, probably too carefully).

I might make two or three high probability “day trades” (I consider them scalps) per day and usually trade either futures (for a bit more leverage) or the index ETFs themselves (DIA, QQQQ, or SPY). I follow the TICK, TRIN, and Breadth, but they usually support my decision-making, rather than trigger trades.

For the sake of trivia, the QQQQ ran a little lower than my target, set up a nice momentum buy divergence, then played out the buy divergence to the upside as expected before rolling over to close at $42.16. I saw the divergence but decided to pass because of the overall weakness of the last few days.

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8 Comments

8 Responses to “Short Scalp Trade Today – QQQQ: Momentum Divergence”

  1. jordan Says:

    Hi! Great insight on how you day trade.

    How do u follow market breadth? What indicators do you use? Thks

  2. Corey Says:

    Thanks Jordan for the comment and compliment.

    The breadth indicator I use is simply a plot of the advancing stocks vs. the declining stocks on a custom line graph in TradeStation. The symbols are $ADV and $DECL respectively. It sets the “tone” of the day by telling us how many stocks are advancing on the day relative to declining stocks – it is more permanent than the TICK, which is a very short-term impulse indicator. Example: If the Breadth is strongly positive, I will only take long set-ups (vice versa).

    For day-trading, I use the 20 and 50 period Exponential Moving averages in ‘trending’ environments and the stochastic oscillator for rangebound environments. I always show the custom-set MACD at the bottom (“3/10 Oscillator”) which sets up and identifies momentum conditions (impulses and especially divergences).

    I tend to make scalp plays on the 5 minute charts and keep up the daily chart, 30 minute chart, and 15 minute charts.

    As opposed to most day-traders, I avoid news and “high-flying” stocks most day traders are drawn towards. I consider myself falling between the classifications “scalping” and “day-trading.” I typically hold swing positions for a few days but will make 3 or 4 “day trades” per day as market conditions and opportunity permit. I want to be able hold trades longer, but am more comfortable playing for small, high probability targets, rather than holding through retracements.

  3. Paul Says:

    Hello Mr. Rosenbloom,

    Great website! You service to trading community is a treasure!!
    I would like to find out more about how you use the TICK and TRIN indicators for intraday trading. I know these are only helping and not the leading indicators in your trading. Nonetheless, what numbers do you use for TICK and TRIN to support your buy and sell signals?

    Thanks in advance,
    Paul.

  4. Corey Rosenbloom Says:

    Paul,

    Thank you for your comment and support.

    I display the TICK and the TRIN (as well as TIKI and UpVolume vs DownVolume) at the bottom left of my intraday trading screens for confirmation/non-confirmation. I know some traders who only base trading decisions on certain readings or interpretations of these measures, but they’re not as important to me. I’ve tended to overrule what I was seeing on the charts when I felt a TICK reading was too high (in the event that I saw a buying opportunity, but the TICK was already at 800 or above) and missed moves because of that. The thinking is “fade high TICK readings” and whenever I attempted to do so, or did not take trades because the TICK was high, it led me to miss moves or second-guess myself.

    I only look at the “Trend” of the TRIN and not necessarily the absolute reading. The aggregate reading is more important, as it shows a broader perspective of the market – asking which direction volume is flowing. Above 1.0 indicates more ‘selling’ volume and below 1.0 indicates more ‘buying’ volume. Sometimes if the TRIN is too extreme – or has trended say upwards all morning, then I will overrule any ‘long’ trades and only take short scalps/daytrades. I actually am more concerned – while daytrading – in the TRIN’s direction than the TICK’s readings. It’s just my preference – other traders have different strategies.

    Thank you for your question,

    Corey

  5. Paul Says:

    Thank you Corey.
    I see that you also use TIKI and UpVolume vs DownVolume. How exactly do you use them? Are there certain numbers for those indicators that you found helpful?
    Thanks again!!
    Paul

  6. Corey Rosenbloom Says:

    I don’t display these values on the charts I post because they require deeper explanation, and I only have so much screen space on the blog – else I would. I mainly use them for confirmation/non-confirmation after I see a set-up, or to filter setups.

    Because I follow the @YM (Dow-Mini) and DIA (Dow Jones ETF) so closely, the TIKI is a better reflector of what I’m looking for than the TICK, to be honest.

    The UpVol and DownVol are still confirmation/non-confirmation. I also post the Advancers and Decliners in a combined chart and view the spread between them to determine potential directional bias and when I should use more leverage (when I observe more points of confirmation between readings).

    Of course, the standard levels for TICK are plus or minus 1,000, but I have pre-alerts at plus/minus 800. For the TIKI, the standard is plus/minus 24, but my alerts trigger at 20.

    I really don’t do much in terms of number levels or alerts for the UpVol/DownVol or Breadth, only observe them.

    I’m mainly concerned with momentum, price swings, support/resistance, and relative pivot points. Anything else serves as confirmation/non-confirmation of what I’m seeing.

    Corey

  7. Paul Says:

    Thank you Corey. You can not imagine how much I appreciate to read about what you do on daily basis and get a response (to beginner’s questions) from an experienced trader like you.
    That said, there is a lot of discussion about trading with actual stops and therefore tipping the market maker into triggering and taking them out. Do you think that this is a “myth” or a true fact? Are you comfortable showing your stops to them??
    I am not sure if I would have enough time to sell at my menthal stops in “fast trading”. But on another hand not sure if I would want to tip my hand, especially when the stop is close to the entry.
    What do you think?

    Thanks,
    Paul.

  8. Corey Rosenbloom Says:

    Paul,

    I’m happy to help! Thank you for the support.

    This topic requires a lot more than a small comment box, and is far more complicated.

    In short, the answer from me is “it depends”. We are seeing a lot more ‘fade’ moves in the market, where something ‘should’ happen and has been documented to have happened, and ironically, the more items are discussed and the more traders do the same thing at the same time, these fade moves are more common.

    “Popular” stocks with ‘popular’ patterns tend to get ‘faded’ (stop-runs) the most.
    “Unpopular” stocks with ‘popular’ patterns tend not to be ‘faded’ as much.

    What do I do? Mostly when daytrading, I use mental stops if the position is large. If I’m trying out a new idea/strategy or don’t feel extremely confident (haven’t experienced it before) then I’ll use a hard stop.

    When swing trading, I absolutely use hard stops. No questions asked. I swing trade small positions, though. I swing trade for different reasons than I daytrade (for example, fundamental or ‘sector rotation’ based).

    When I daytrade, it’s purely based on momentum, support/resistance, and pivot points. And when one of those levels fails, I want to be out… but I’ve learned that I need to give more leeway to let the position “reverse” as I expect it to.

    Another honest confession is that if I’m trading larger than 1,000 shares, I will put in a ‘half-stop loss’ meaning I’ll put a hard stop for half the position and try to ‘play around a bit’ with the other half. At my target (profit), I take off the whole position. I don’t scale out. This allows me to ‘have it both ways’ in that if the market reverses (as I expected) after a stop-loss, I participate, but with a smaller position (but at least it’s something) and if price continues to fall (after I’ve given it more room), I lose less with the loss.

    Hope this helps a bit,

    Yours,

    Corey