Great Divergence Resolution Example

Bycjrosen

Friday in the stock market gave us an almost ideal example of the classic rolling momentum divergence and balanced shift in demand from sellers to buyers. Let’s view the pattern:

This is the DIA 5-minute chart.

Notice the higher lows that continuously form in the momentum oscillator as price makes new intraday lows. Eventually, the price will (likely) reverse because of the rolling or balanced divergence.

This is exactly what happens, as the sellers fail to push prices lower and buyers take over the battle. It almost forms a perfect ‘saucer’ type pattern on the chart as you can feel the momentum building.

Notice also in the example how the moving averages resist price until price eventually breaks through, when the averages serve to support price.

Although yesterday represented yet another ‘failed gap fade trade,’ it provided an excellent educational example of a rolling momentum divergence.

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3 Comments

  1. Pingback: Education » Great Divergence Resolution Example

  2. Hi, I’ve been reading your blog for the past month or so and i find it extremely useful. I want to thank you in advance for all the great insights and market analysis. It looks like you use price/momentum divergences quite often and i find them to be very interesting. I have two questions for you:
    1)On average, how long do you hold onto a position ?
    2) What are the parameter values you use for your momentum indicator on your 5 min chart ?

    Thanks
    Andrew.

  3. Andrew,

    Thank you for reading and for the questions.

    1. Typically, I trade the @YM (Dow Mini) intraday, using 5 and 15 minute charts in my active trading account, and so a hold of 1 to 2 hours or less would be average for me. In my swing trading account (which I haven’t been utilizing during the recent high market volatility), I may hold for one to two weeks on individual stocks or sector-specific ETFs.

    2. The values for the “3/10” Oscillator are obtained by using a standard MACD indicator, yet setting the periods (inputs) respectively to 3, 10, 16. That’s the difference in a 10 period and 3 period EMA, smoothed over a 16 period look-back.

    I hope this helps, Corey.

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