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gloe, please take a look at the following and tell me what portions of it you find valid and those you find invalid.
Browse: Home / HotScans Blog / Day & Swing Trading The Space Between Perfect and Divergence
Day & Swing Trading The Space Between Perfect and Divergence
By Geoff Bysshe on October 23, 2011
Rules to trade by when considering trading breakouts and reversals:
1.When everything looks perfect across all 4 market watch charts (SPY, DIA, QQQ and IWM) it is often too late to follow the move in that direction.
2.When the 4 market watch charts diverge it is a warning of potential trend change.
But if you can’t follow the trend when all the indexes are in sync and you can’t trust the trend when it’s not in sync then when can you follow the market’s direction?
Answer: There is a big space between “perfect” and divergence.
We’ll use HotScans, our day and swing trading software, to find the set ups to find the bullish stocks likely to excel in this environment. But for this post I’ll focus on the big picture, but a short answer to stock selection is to look at the scans for Flags, consolidation breakouts (up and down), and stocks trading on volume breaking out of a good opening range pattern.
Now is a great time to look at the contradiction of the 2 statements above, and see that space between perfect and divergence. The SPY and DIA broke out of their 7-day and 2-month consolidation on Friday. But the IWM and QQQ’s did not break out of the last 7 days of consolidation, and while the Q’s have been above their respective multi-month consolidation high, the IWM is not even close to its highs. Sounds like a lot of divergences! In fact, there are a lot of divergences, but here’s how to make sense of it all…
The first consideration is time frame.
I just described the markets based on the daily time frame. We use daily, even weekly and monthly perspectives for setups, but we day trade the intra-day action. If the market is going to correct the temporary divergences on the daily time frame there will be some very nice intra-day bullish moves as Q’s and IWM catch up which will likely also lead to higher moves for SPY and DIA. This is the opportunity for the bulls.
This means that if the markets move from their current mixed and divergent state to a condition where all 4 market watch charts look great on a daily time frame there will be lots of great bullish day trading days (the intra-day time frame) as that move occurs. This potential is what I want you to see in the charts right now!
The second consideration is timing a divergence.
The toughest part of respecting divergences is they fool traders like a mirage in the desert fools a dehydrated hiker! They disappear disappoint and discourage!
Here’s a simple rule to help avoid the divergence trap, and I’ll apply it to the SPY and DIA now. The divergence danger is that the IWM is warning that the SPY and DIA may fail in their attempt to maintain the breakout. This is true. But if you are trading based on this then let the price action in the SPY and DIA tell you when that failure has begun. Until then the IWM divergence is a warning, but also creating the “space between perfection and divergence” that often occurs during market transitions.
The third consideration is an overbought or oversold condition.
The market can continue in their trend when all the market watch are lined up perfectly or very much in sync , and they often do. When this condition exists we look at indicators of the market being too extended.
Every day we look at the condition of the markets on various levels – the phase, pivots, etc. This analysis serves to help determine if the markets are moving in a direction consistent with a daily divergence pattern or more toward the disappearance of the divergence.
Currently all 4 are in a recovery phase with the 10 and 20-day MA’s positively stacked and sloped positively as well. Only the Q’s are above their 200 day MA so this is big level of resistance for the other 3 markets is still trying to overcome it. So the longer term daily trend is “recovering” in a bullish way.
From a 3 day perspective all 4 market watch have a bullish bias, which means they have closed over their 3-day pivot high and have not since closed below their 3 day pivot low. They have all transitioned from a bearish bias in the last day or two which is a strong short-term bullish condition in the context of our current bullish longer term trend.
On a short-term basis, all 4 market watch charts have positively stacked 1-day pivots. In the context of a bullish intermediate and longer term measures highlighted above this means O.R. breakouts and bullish O.R. reversals are both strategies to focus on right now. This bullish bias will remain until a break or the Floor Trader Pivot level of S1.
In conclusion, the markets are in a bullish condition from the short term up to the daily charts according to our day-to-day, and intra-day rules. As stated above this means we’ll focus on bullish breakouts and reversals. So while the daily divergence condition should be handled by being vigilant of the SPY and DIA turning bearish on the shorter-term rules, buying weakness against a bullish bias enables the trader to take advantage of the larger moves that can occur in space between perfect and divergence.
The existence of a divergence a significant move and at such a key resistance area, also creates a big potential for short trade set ups that should be the focus if the divergence turns into the predominant focus. The details of that transition are for a future post. However, this is the reason you will see a long list of both long set ups and short set ups on our Focus List right now.
From http://www.marketgauge.com/?p=4671/
In your latest update of an older post, you said you were using a daily chart. That makes it all clear. You are right, tough market for a daily chart right now.
If you see no benefit in my signals then you don't have to pay attention to them.
So what is the benefit to anyone of posting them?
The signals that I am posting don't represent my actual trading. I went long TNA mid-day on 5/21 and got out with about a 10% gain.
It is true that this recent signal if taken on "next day open" went basically nowhere.
When the market is choppy, a 30 min or 60 min system such as yours will do better than a daily signal.
Gloe, according to this post you are now short. I went back and saw where you went long on 5/21 at 5pm. At the open on 5/22, IWM was 76.40 and at 1pm yesterday it was 77.11. That is a gain of less than 1%. I understand now that your system is for an intermediate trading time frame or even longer. And certainly over the last few weeks, the overall move has been nowhere.
You may be interested in Liquidity Inflows from StokTiming.com. We may have 'window dressing' yet:
Remember last Friday's discussion on what was the "missing data" was for market investors?
It was Inflowing Liquidity levels and its direction.
Jesse Livermore had it right when he commented on how the market works. He said that the market was "all about money" .... "When money is flowing into the market, it goes up. When money is flowing out of the market, it goes down."
Think about it and its simplicity. More money chasing after something typically means the price will go up ... which takes us to today's chart that measures Inflowing Liquidity levels. (The chart is updated daily and can be found on the Standard subscriber site; Section 4, Charts 8-1, 8-2, and 8-3.)
Take a look at today's chart and answer these questions:
1. Since May of this year, has the Inflowing Liquidity been in Expansion or Contraction?
2. Since the beginning of June, has the Inflowing Liquidity been in a down trend or up trend?
The answers are: 1. Contraction, and 2. An up trend. Bottom line: It is in Contraction, but up trending.
As scary as yesterday was to some, Inflowing Liquidity was still in a technical up trend even though it showed a down tick on its daily action ... because it still had a higher/low.
That bodes well for today and beyond as long as it remains in its up trend. If it drops and falls lower, into Quadrant 4 Contraction territory, then the outflow of money would drag the market down.
For now, we still have an up trend in Liquidity levels, and that is a positive.
http://www.stocktiming.com/Friday-DailyMarketUpdate.htm
I guess we will see.
As long as there is less than a 50% retracement of yesterday's sell off the bear market remains intact and the 3 leg bull correction is over.
Well, those resistances sure held.
A bunch of sling shot shorts also.
The signal is on SELL, but this is a difficult area and I need to watch it closely.
The SPY retraced 76.4% of the previous upswing. Such a large correction is not conducive to further upward momentum.
hi gloe
some i hear are saying that about the weather in NYC and in NJ etc.
might you be speaking about that LOL
no need reply to this for i am just saying hello
for i have not dropped by for a while.
Best wishes,
City Hawk
*** and perhaps a little more hawkish as of late ? flying at 15 min looking to strike on a 5min which is indeed more hawkish than a 5 to 1 LOL and perhaps at some point i will fly to higher zones ???***
And it's certainly been an ugly day.
ah yes, window dressing!
IWM printed a DT yesterday at 79.08. This time SPY was weaker than IWM and failed to reach a DT by 15 cents. This caused my pairs ratio to fail to produce divergence on the DT. Markets were at significant resistance levels. How ever, it is important to remember that we are nearing the close of the quarter and some some significant 'window dressing' could take place as the month closes.
My logic for constructing the chart was based upon the assumption that IWM would lead SPY up and down. However I found that that is is currently not the case. IWM is under performing SPY at intermediate swing tops and bottoms. Consequently it has value as a divergent leading indicator only at market tops given that IWM has a higher beta than SPY. Conversely my divergence indicator indicator will check for divergence of the defined input series against price. In this case I have defined SPY as the input series (given it outperforms bullish) against the price of IWM. Therefore only the buy signals and not the sell signals you see on the SPY are valid. If there is anything specifically on the chart that you would like explained just ask.
Still on BUY, but the indices are hitting important resistance areas.
It's hard for me to figure out your chart, but I do see IWM underperforming the big caps, and agree that is not a good sign for bulls.
If I eliminate the extra swing and calculate manually the figures are as follows;
Swing High:
57.1% < the 71.2% SPY
Swing Low:
87.5% > the 79.1% SPY
Comparing the lows I get;
IWM: 0.29% higher
SPY: 0.35% higher
These values are in line with my expectations. SPY outperformed IWM at last weeks low.
IWM underperforms SPY on the upswings therefore leads on the downswings with divergence at tops. SPY outperforms IWM at bottoms therefore leads on upswings with divergence at bottoms. This is symptomatic of a fear induced 'flight to quality'. Unfortunately due to the volatility of the IWM, PAS chose to put an extra swing in at the recent bottom making the figures worthless for comparison. Note the reduced % on the recent swing high of the IWM relative to the SPY.
Still on BUY. But beware the Fed announcement tomorrow.
Thanks for the comment. You're welcome.
Gotta say I AM impressed with the accuracy of your signal GLOE. It has definitely worked out well here. Thank you again for your generous sharing.
The Fib 61.8% retracement on the SPX has been met.
Both the SPY & IWM have now gapped up to make a HH completely voiding the signal from yesterday.
And the signal remains on BUY.
Thanks for doing that. Very cool.
I drew arrows on this chart to indicate where approximately the long term trades would have been. Of course this does not include your short term signals which are not always posted. The chart is a little small (I don't know how to make it larger). The one flat call is indicated with a 45 degree arrow with an 'F' beside it. Looks like you have done an excellent job over all gloe, congratulations.
M, the post you asked about is #1691.
I've been looking at a bazillion different charts on SPY along with a cartload of other factors and my best good guess is a full on retraction coming next week.
Chartwise see how the candles on your chart were following above the 20,50,200dma up until last August and then again in January 2012 up until May of this year where as you have noted: it bounced off the 50dma.
I think the candles retest the 50ma bounce / break, if it breaks it, [which I definitely think it's going to do] then support around 120 / 115 if this area is broken then it could reach to bounce / break the 200dma around 110.
To the extent at which a correction will exacerbate itself is unsure, but there definitely is one setting up on the charts I've looked at, all of them.
HI Murray, thanks for the comments. Could be an interesting week coming up!
Disclaimer: I neglected to add that last week was Op Ex so it is no surprise that the week ended where it started: Max Pain. Therefore the week has little predictive value and my previous post should be taken with a grain of salt.
Last week formed a rare & bearish dragonfly doji. After the SPY bounced off of the 50 MA (200 on the daily) the prior week I believe the bullish correction is over and more downside action is in order for next week. The Force Index is still below zero in spite of 2 weeks of bullish action, this is not bullish.
It is interesting to note that previously in the last 3 years the STO has always bounced off of the 20 but last month the weekly dipped below it. We have yet to see the long wicks formed on the bottom of reversal candles at support in this bear market.
The signal remains on BUY.
AB=CD correction projects to 9.35 and the prior 2 hit it to the cent. But as the chart shows never front run the news. Incease in Natural gas storage came in at 67B cu' with 55B forecast. Why that would make prices skyrocket is beyond me (inverse ETF)! Looks like I'm going to fade this one when I'm confident that its turned around.
My signals can be used for any major index. I don't know how to answer your other question. Sorry.
Hi gloe, Is there a specific index your signals apply to or can any index be traded based on them? BTW, I have noticed in day trading that when the retracement is >=76.4% the next swing H or L is frequently the peak or trough on the 6E. Does this apply to the stock indexes and if so on all TFs? I hope you don't mind my questions, have a great day.
The signal remains on BUY.
The signal remains on BUY.
[T]he rhythm [of the market] always changes and our ongoing job [as traders] is to recognize it on a daily basis and simply react. As I've said before, the finger always points one way -- inward. . . . [A]s with everything in trading, there's no one-size-fits-all answer and every successful trader on this planet has to discover his/her own way. From my hero Don Miller: http://donmillerjournal.blogspot.com/2009/04/wednesday-notes-watch-out.html
A few more favorite quotes:
To whatever degree you haven't accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully. ~ Mark Douglas
Becoming a successful [trader] shares a lot with sports: the need for an edge, the absolute requirement for discipline, and Bill Belichick's comment, "more important than the will to win is the will to prepare to win." from rosen.blogspot.com
Mark Douglas: The 5 Fundamental Truths of Trading
1. Anything can happen. 2. You don't need to know what is going to happen next in order to make money. 3. There is a random distribution between wins and losses for any given set of variables that define an edge. 4. An edge is nothing more than an indication of a higher probability of one thing happening over another. 5. Every moment in the market is unique.
Some trading Tactics and Set Ups: http://www.hardrightedge.com/tw.htm
The Psychological Risks in Trading http://www.investorshub.com/boards/read_msg.asp?message_id=10679356
A favorite site: http://www.brettsteenbarger.com/weblog.htm and http://www.minyanville.com/ http://marketstockwatch.blogspot.com/
Great market comments and trade ideas: http://caracommunity.com/main_posts
Market Commentary and Charts: http://xrysos.blogspot.com/
Markets and Trading: http://bigpicture.typepad.com/comments/
Market Wizards collection: http://www.hardrightedge.com/wizard.htm
Charts I like: http://fallondpicks.com/index.htm Winfree: http://tinyurl.com/eduy2 New: http://tinyurl.com/k85ej
Chan: http://tinyurl.com/wzrk Craig's List http://tinyurl.com/tpqoc
Breadth Charts: http://www.etfinvestmentoutlook.com/index.php
Sector Performance at a glance: http://stockcharts.com/charts/performance/SPSectors.html
Eco/politics: http://robertreich.blogspot.com/
Free gurus:http://trendythird.blogspot.com/ http://gurutimer.com/index.html http://technitrend.blogspot.com/ http://xtrends.blogspot.com/
Quotetracker Charts Help: http://www.forum.qtusers.com/index.php
Charts: http://finviz.com/futures_charts.ashx?t=ES&p=m5
*New: Daytrading/Journal Blog: http://donmillerjournal.blogspot.com/
*New Essentials of Trading Blog: http://www.theessentialsoftrading.com/Blog/index.php/trading-articles/
*New from Dr. Brett: http://becomeyourowntradingcoach.blogspot.com/ His new book: http://www.amazon.com/Daily-Trading-Coach-Becoming-Psychologist/dp/0470398566/ref=pd_sim_b_2
Machines: http://www.tradingcomputers.com/
Good stuff here: http://slopeofhope.com/ http://www.traders-talk.com/mb2/index.php?showforum=2 here: http://www.philstockworld.com/ and here: http://www.ttheory.com/ http://unbiasedtrading.blogspot.com/ http://www.ubtnb3.blogspot.com/ http://benbittrolff.blogspot.com/ http://www.tradingtheodds.com/
Great blog, now X2: http://ronsen.blogspot.com/ http://sixtybyten.blogspot.com/
CME Holiday Calendar http://www.cmegroup.com/tools-information/holiday-calendar/
One final great quote: Human potential is the same for all. If you have will power, then you can change anything. ~Dalai Lama
Gloe with Sally Dog (RIP dear Doggie): http://investorshub.advfn.com/boards/read_msg.aspx?message_id=39881400
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Trading Strategies:
MarketSci Sector Rotation: http://marketsci.wordpress.com/2010/05/18/roundup-fundztrader-sector-rotation-strategy/
Blogs About Trading Strategies: http://en.wordpress.com/tag/trading-strategies/
The 10/20 MA Bullish Percentage Strategy: This is a LONG-ONLY strategy and trades the QQQ or QLD (or similar) using the $BPNDX with the 10 and 20 MAs. From 100% cash, go long 50% of your port when the BPNDX crosses above the 10 MA; go long the other 50% of your port when the BPNDX crosses above the 20 MA. Cash out 50% when the BPNDX goes below the 10MA; then cash out the other 50% when the BPNDX goes below the 20 MA. And yes, you might sometimes get out 50% to cash, and then get back in fully 100% invested, as the 10 MA breaks and then retakes. Using this method, you will avoid all major bear market plunges.
ETF site: http://www.etftrends.com/
Disclaimer: These posts are for educational purposes only. If I knew what I was doing, I would be rich by now! Do your own due diligence and consult your licensed financial advisor before making any trade.
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