Day-trading yesterday? Corey shows how to spot intraday trend reversals: he watches price, tick, breath and momentum divergences. Here’s how. – Ilene
Massive Internal Divergences Predict Intraday Trend Reversals
Courtesy of Corey Rosenbloom at Afraid to Trade
Using today’s price action so far as an example, let me walk you inside the price action for April 30, 2009 in the SPY to discover that massive TICK, Breadth, and Momentum divergences all formed, clueing you in that a price reversal was far more likely than price continuation. Let’s walk through the market internals quickly to see how knowledge of this concept could have led to profits.
Let me walk you through this chart step-by-step so you can make the most of it.
The main idea to learn is that a TICK and Breadth divergence formed as price made weak new highs, and the doji reversal candles at the highs – complete with TICK, Breadth, and Momentum (not shown) Divergences all signaled a powerful low-risk short-selling opportunity that was irresistible.
To show this, let me explain the functions on the chart. We’re looking at the 1-min SPY (S&P 500 ETF). Underneath (in blue) I’m showing the TICK (number of advancing stocks on an uptick at the moment minus number of declining stocks on a downtick). On the third line, I’m showing just the Number of NYSE Declining Stocks ($DECL) – usually you look at this in conjunction with the Net Advancing Stocks ($ADV) but the hidden signal came from the advancing stocks remaining the same but there was a steady ebb upwards in the number of stocks that switched to declining on the day – that’s what I want to show).
Finally, I’m showing the classic Breadth, which is the ’spread’ using the formula $ADV minus $DECL (or number of advancing stocks positive on the day minus the number of declining stocks negative on the day).
Moving right along, price began the morning with an overnight gap (not shown as to focus on the chart scaling – I cut off the first few opening 1-min bars), so people assumed underlying strength in the market and most likely ‘went long.’ Price did continue its trek higher, breadth slightly expanded, and the TICK registered a marginal high at 10:15 EST. The SPY traded at $88.90.
Price swung back down for the next hour and then made a new high on the day at $89.00.
However, look very closely at the Market Internals. At the same time price made a new swing high above its $88.90 morning high, the following took place:
The TICK registered a lower high reading than the morning (1015 at the morning high vs 672 for the absolute high of the day)
The $DECL Decliners line registered a higher reading (more stocks were down on the day at the afternoon high than the morning high… the morning high saw 507 stocks down on the day while the afternoon high saw 593 stocks down on the day – almost 100 stocks were now trading lower on the day than the were when the SPY made a prior intraday high)
The Breadth (spread) line registered a lower reading than the morning high. The “Breadth” line in the morning high showed a positive value of 1,870 difference in ADV and DECL while the afternoon $89.00 high showed a breadth difference of 1,780 – again, almost 100 stocks different)
The 3/10 Momentum Oscillator (not shown) also registered a higher low, carving in a negative momentum divergence on the 11:20am high.
Taken together, the “Weight of the Evidence” showed odds overwhelmingly favored for a downward move rather than an up-move. Or stated differently, the 11:20am high was not confirmed by strength as indicated by the Market Internal readings. Such non-confirmations and divergences almost always result in actual price reversals.
Take time after the close to study your charts so that you’ll see more of these developments in real-time as they occur – and know what to look for in advance as the day progresses.
