Three Trading Lessons from October 1 Intraday Rounded Reversal

Oct 2, 2013: 1:01 PM CST

How do you recognize an intraday “Rounded Reversal” developing in real time?

Let’s take a look at the near-textbook example from October 1st and learn three factors that tend to precede – or trigger – an intraday Rounded Reversal or “Failed Trend Day” pattern.

Here’s the 5-min @ES Futures chart with the three main factors highlighted:

ES Futures @ES SP500 S&P 500 SP mini trading tactics lessons rounded reversal divergences breakdown intraday trading

First, a Trend Day often begins with pre-market news/activity and an opening gap.  A true trend day begins with a gap and price continues moving in the direction of the gap for the rest of the session.

See a lengthy compilation of 21 posts and lessons regarding Trend Days from the archives.

Just because price starts the day with an opening gap and continues moving in the direction of the gap does not mean it will spend all day doing so.

When price starts the session as a trend day but fails mid-session, we call these “Failed Trend Days” or “Rounded Reversal” Sessions.

There are three main factors that tend to precede and trigger a Rounded Reversal in motion:

1.  Multi-Swing Negative Divergences

Using the 3/10 Momentum Oscillator (or similar indicator such as Rate of Change) or Market Internals such as NYSE TICK or Breadth, we can compare intraday price highs with corresponding oscillator highs.

If price continues to push to new intraday highs but our oscillator or market internals registers lower highs, it serves as a non-confirmation as a divergence builds.

While it’s commong to see divergences on any Trend Day, be on guard for MULTI-swing divergences.

2.   Kick-Off Signals

Similarly, if we see price swinging down off an intraday high, it’s likely just another typical retracement.

However, if we see our oscillator and/or Market Internals make new lows for the session, this calls the ’simple retracement’ into question and suggests it may be the first swing down in a new downtrend at a key reversal.

This is similar logic to Richard Wyckoff’s “Sign of Strength” or “Sign of Weakness.”

I use red and green dots in TradeStation to highlight new intraday highs or lows for easy comparison.

3.  Price Breakdown

Indicators are helpful, but we make trading decisions and final confirmation with price itself.

The final signal or the third step in a Rounded Reversal is both a factor to watch and a trading trigger/entry signal (in this case, short).

When price breaks under the 50 EMA or corresponding intraday trendline on a 5-min chart, it typically signals the official end of the Trend Day in motion.

It’s also a low-risk, tight-stop trigger-entry point to play for the potential downward swing yet to come if indeed the session unfolds as a Rounded Reversal.

Here’s the same three-step process on a 1-min @ES Chart:

SP 500 1-min intraday chart rounded reversal breakdown divergence day structure pattern

Keep in mind also that the real-world trading environments – like this one – can differ from the textbook definitions with “spikes” or “last gasp” rallies such as that which happened at 11:30am CST or in fact the surprise spike higher into the close.

Ultimately price did reverse lower to continue the Rounded Reversal – the final target is often a retest of movement down toward the prior swing low (1,677 in this case).

This is just one example of the intraday version of the Rounded Reversal concept, but we can see it play out on higher frames and in various markets as well.

Here are some additional examples for you to reference:

“Crude Oil and One of My Favorite Trading Patterns – Rounded Reversal”

“A Breakout and Trend [Rounded] Reversal for Apple AAPL”

“Netflix NFLX Scanning and Rounded Reversal Pattern”

Rounded Arcs/Reversals and Fibonacci Charting for Netflix NFLX

A Rounded Reversal for Bond Fund TLT

“Market Internals and Intraday Reversal for December 12, 2012″

Gold’s Rounded Reversal and Key Levels

Lesson in Trading Intraday Arc Trendline Breaks/Reversals

Gold Trapped Between Rounded Arc Support and Horizontal Resistance

Log-View of the Arc Trendlines on the US Market Indexes (April 2010 ahead of “Flash Crash”)

Updated Arc Patterns on the US Indexes (again, ahead of “Flash Crash”)

Sell-off in Crude Oil from Intraday Rounded Reversal (May 10, 2010)

TLT “Arcs” Down into Support

In summary, there’s two main ways to play Arc patterns on any timeframe:

1.  Play the Continuation of Price through the duration of the “Arc”

2.  Play a Reversal/Breakout through an Arc Trendline

Join fellow members to receive daily commentary and detailed analysis each evening by joining our membership services for daily or weekly commentary, education (free education section), and timely analysis.

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 along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

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7 Comments

7 Responses to “Three Trading Lessons from October 1 Intraday Rounded Reversal”

  1. theyenguy Says:

    Thursday, October 3, 2013, was a bearish day, as ETF Daily News reports Outer limits of monetary policy and inflation and the Finviz Chart of the Market OFF ETN, OFF, rose, and the Yahoo Finance Chart of Volatility, ^VIX, also rose, stimulating Volatility ETFs, TVIX,VIXY,VIXM, higher. The Great Bear Market that commenced Friday September 20, 2013, recommenced Thursday, October 3, 2013, as is seen in the 200% Bear Market ETFS, such as BIS, FXP, SQQQ, SDD, SSG, trading higher.

    The chart of the S&P 500, $SPX, shows a 0.9% close lower at 1,697; its 50 day moving average.

    Nations trading lower included

    Indonesia, IDX,

    Mexico, EWW

    Philippines, EPHE

    Turkey, TUR

    Brazil, EWZ, and Brazil Small Caps, EWZS

    Sectors trading lower included

    Inverse Volatility, XIV

    Solar, TAN

    Internet Retail, FDN

    Nasdaq Internet, PNQI

    Biotechnology, IBB

    Homebuilding, ITB

    US Infrastructure, PKB

    Media, PBS

    Design Build, FLM

    Small Cap Pure Value, RZV

    Aerospace, IBB

    Small Cap Industrials, PSCI

    Industrials, XLI

    Paper Producers, WOOD

    Automobiles, CARZ

    Steel, SLX

    IPOS, FPX

    Consumer Discretionary, IYC

    Retail, XRT

    Yield Bearing Sectors trading lower included

    Utilities, XLU

    Global Real Estate, DRW

    Real Estate, IYR

    Leveraged Buyouts, PSP

    Of note, Global Consumer Staples, KXI, seen in this Finviz Screener, which includes TSN, PG, KRFT, MDLZ, CAG, and GIS, is a loss leading sector, since September 20, 2013, as is seen in their combined ongoing Yahoo Finance Chart.

    The decline in the price of Gold, $GOLD, since late August 2013, is a buying opportunity, as the Gold ETF, GLD, is in an Elliott Wave 3 Up, from its early July 2013 bottom of 117.5, as is seen its Weekly Finviz Chart. The Elliott Wave 3 Ups, are the most dramatic of all economic waves, and create the bulk of wealth gains, of all of the ascending five waves

    On Thursday, October 3, 2013, Spot Gold, $GOLD, closed at $1,316, with support lower at $1,300 and a strong floor at $1,275. The chart of the Gold ETF, GLD, rose slightly, to the edge of a massive consolidation triangle, to close at 127, from which it will either break out, or break lower. Either way, it is wise to Dollar Cost Average, an investment in the purchase of gold bullion, as in the age of authoritarianism, the possession of gold and diktat, will be the two forms of sovereign and sustainable wealth.

    The chart of the Euro, FXE, shows a close at 134.82; I suspect that this is its rally high.

    The chart of the Yen, FXY, shows a close at 100.54; I suspect that it is reaching its rally high.

    The Yahoo Finance chart of the EUR/JPY, and the Google Finance Chart of the EUR/JPY show a close at 134.45; from which I expect a trade lower, as the Great Bear Market of all time gets strongly underway.

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