One of My Favorite Intraday Trading Set-Ups

By Corey Rosenbloom | February 15, 2012 | 9:34 AM |  0 CommentsTweet This

I wanted to highlight one of my favorite intraday trading “combo” set-ups that occurred twice on February 13th.

It’s the “Retracement plus Dual Divergence” set-up that develops on all timeframes.

Let’s take a quick moment to study this set-up as it appeared on the intraday frame and how we can apply it to other situations.

First, here’s the SPY 5-min intraday chart from Feb. 13, 2012:

 

 

In trending markets, we want to look for retracement or pullback entries to give us low-risk entries into a developing trend.

While you can simply trade a classic pullback to support – like a bull flag pattern – you can enhance your execution and trade management by dropping to a lower timeframe to see what’s happening on the lower timeframe chart.

For example,  Trade #1 pulled back to the rising 20 EMA and 200 SMA after a strong up-opening and initial retracement.

Trade #2 similarly pulled back in ‘bull flag’ style towards the lower Bollinger Band and $135 “round number” support.

Again, both were classic retracement trade entries on the intraday (5-min) frame and both trades were successful in the context of the bullish trend day that ultimately developed.

However, let’s take it a step further and look specifically at the 1-min lower timeframe chart that developed in real time with both of these classic ‘higher timeframe’ retracement trades.

Here’s the 10:00am CST trade as seen on the 1-min chart:

 

The lower timeframes give us a clearer or more detailed picture of what we’re seeing on the higher frame charts.

In this case, in the context of a 5-min chart pullback to support, the 1-min chart developed a “Triple Swing” positive dual momentum and TICK (internal) divergence.

We’re seeing the 3/10 MACD Momentum Oscillator with the NYSE TICK Market Internal – the divergence developed when price pushed to new session lows while both indicators formed higher lows.

Divergences often precede reversals in price – as was the case here – and the trick is to put the pieces together.

To combine the two charts, we have:

A)  A 5-min chart pullback/retracement to EMA support

B)  A 1-min multi-swing positive dual Momentum and TICK Divergence

For traders who need a little more information or ‘proof’ before putting on a trade, combining timeframe (charts) like this may be a very good solution.

The official ‘breakthrough buy’ signal triggers when price breaks through the falling trendline or EMAs on the lower frame.

Keep in mind this logic works not just for the 5-min and 1-min combo, but for any type of higher plus lower timeframe set-up (though market internals tend to be clearer on intraday frames).

This is the type of “Creating Trades” information I’ll be discussing at my upcoming live webcast session Monday, February 20th at 8:00am EST at the Traders Expo New York.

The “Retracement Plus Dual Divergence” Set-up above is a good example of this type of trading tactic.

In general, most pro-trend retracement trades set a minimum target of the prior swing high or ideally a spot just beyond the prior high.

The stop often goes under the expected swing low, which would be under $134.80 in this example.

Depending on your risk-tolerance, the aggressive entry occurs INTO the expected support line on the higher frame while the conservative entry occurs AFTER price has bounced up off the expected support line, often on a break of a falling trendline.

Let’s see the picture on Trade #2’s similar support retracement at 12:00pm CST:

 

We can’t always know in advance how well a trade will work – Trade #2 outperformed the first retracement set-up.

The 1-min chart at 11:45am CST reveals a dual positive divergence (momentum and TICK) as price retraced on the 5-min chart to the likely support of the $135.00 “round number” area (1,350 in the S&P 500) and 5-min lower Bollinger Band.

Again, very aggressive traders can enter a buy order as price tests (trades) near the $135 area while conservative traders can enter a trade once price “proves itself” by rallying off the expected support price and then breaks above a falling trendline or 1-min EMA structure.

This time, price traded well above the prior swing high at $135.25 – a minimum target – and on to peak at $135.50 before reversing into the close.

While I’m using the SPY as a lesson example, this same logic applies to the @ES futures, as seen in the chart below:

 

If you’re thinking “The profit targets are so low in this example,” then it’s due to the small timeframes of the intraday 5-min and 1-min charts.

If you see this same Higher Timeframe + Lower Timeframe Divergence set-up on a Weekly and Daily chart of a stock or ETF, then of course the profit target (and stop-loss) would be much larger.

The logic would be the same no matter what stock or market you trade – I’m just showing the active intraday market for this particular example.

To sum up the quick lesson:

When you’re looking to trade a potential retracement set-up to a possible support area on a higher timeframe, it can be helpful to take a moment to drop to a lower timeframe to see what the lower chart reveals.

If the lower timeframe shows positive momentum, internal, or other indicator divergences, then you can have additional confidence in the trade.

Plus, you’ll be able to fine-tune your precise entry (often on a trendline or EMA breakthrough on the lower frame) and manage your trade more efficiently.

There’s no guarantee that any trade will work perfectly, but in general, the more you put in your favor (without being overwhelmed or paralyzed by analysis), the better you’ll be.

This type of “Retracement plus Divergence” logic may be something you can add to your developing trading strategies.

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Some Long-Term Perspective on Where This Market Is

By Corey Rosenbloom | February 08, 2012 | 8:48 AM |  0 CommentsTweet This

With US Equity Indexes challenging and breaking to new recovery highs, it can be helpful to take a moment to raise your perspective to the monthly chart frame.

Let’s take a quick look at the monthly index charts, starting with the S&P 500:

 

 

The S&P 500 lags the Dow and NASDAQ at the moment, as it has not yet broken officially to new recovery highs beyond the May 2011 peak (1,370).

Nevertheless, we can see the bigger picture structure over the last 15 years in the chart above.

The key “narrative” highlights would be the pre-2000 “Tech Bubble” run-up, post 2000 crash and recession, stable recovery into the 2007 peak, 2008 financial crisis, and the current liquidity-infused recovery.

We’ll also discuss a chart-based theme regarding “Open Air” on further bullish movement above these key chart levels.

Next, the Dow Jones Index:

 

 

Interestingly, when compared to the S&P 500, the Dow Jones had less of a severe decline during the 2000 to 2003 bear market and a stronger recovery from 2003 to the 2007 peak.

The 2008 crisis bear market and 2009 to present recovery are structurally similar, except that the Dow Jones broke to new recovery highs this week.

The NASDAQ has the most unusual historical chart of the three big indexes, due to the 2000 period:

 

 

The 2000 period centered around the “Tech Bubble” run-up to the 5,000 index peak and subsequent Tech Crash from 5,000 to 1,250.

Beyond the steepness of the spike and fall at the beginning of the decade, the NASDAQ has one more unique quality when compared to the Dow and S&P 500:

The NASDAQ has twice pushed to new recovery highs ABOVE the 2007 peak, bringing the NASDAQ into price territory not seen since 2001’s crash period.

What’s the Main Idea Now?

As mentioned in prior posts, “Creeper Trends” can carry price further than many traders think it can go.

It can be financially devastating to fight a strong – or even creeper – trend in price.

As price breaks visual (obvious) resistance areas on the charts, it forces traders to make adjustments accordingly, particularly the higher price travels beyond these levels.

Short-sellers must determine how much conviction they have in their positions, and set a point where they will liquidate their positions.

Sidelined investors and traders may interpret a break to new recovery highs, and the media attention that accompanies it, as a reason to invest more money into the stock market (put on new positions) or else add additional capital to existing positions.

Either way, sustained breakouts tend to propel prices even higher as these traders and investors interact – some gladly entering new positions; others sadly exiting losing positions.

You can look to prior ‘Big Picture” levels to see how this situation played out, particularly during the low-volatility “Creeper Trend” from 2004 to 2006.

The indexes took a powerful run higher into the 2007 peak.

A similar powerful breakout/sustained rally occurred in late 2010 on the firm breakthroughs above the 2010 “Flash Crash” April highs.

From an unbiased game-planning perspective, if sellers do not stop the advances in the markets into these “obvious” price levels, we may very well see a Paradigm Shift that propels these indexes through the “Open Air” above the 2011 highs in a similar method as past “major” breakouts.

Key levels are often Battle Zones for buyers and sellers… but eventually one side wins the battle.

If the bulls win here at the “Battle for New Recovery Highs,” then we may be watching history in the making as the indexes begin a new journey towards their 2007 peaks… which the NASDAQ has already accomplished.

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The Dreaded Creeper Trend

By Corey Rosenbloom | January 27, 2012 | 9:31 AM |  0 CommentsTweet This

One of the main activities that trip up traders, especially new traders, is the concept of continual price movement in one direction without meaningful pullbacks – also known as “powerful trends,” “creeper trends,” or “positive feedback loops.”

Let’s take a look at the current situation and put it in the context of prior S&P 500 day-over-day one directional movement.

First, the hourly S&P 500 pure price chart:

 

 

Let’s first define a “Positive Feedback Loop” and see how that concept explains these situations.

A Positive Feedback Loop occurs when one action leads to continual (or more) of the same action, such as higher prices resulting in higher prices, with these new higher prices resulting in even higher prices, and so on.

A real-world example includes situations of alarm or panic in a crowd, where a small number of people initially exhibit panic behavior (perhaps screaming or rushing for the exits) which leads to more people exhibiting panic behavior, which in turn leads to even more people in the crowd exhibiting panic behavior until everyone in the crowd is sufficiently panicked or else has escaped the building or situation.

By contrast, a Negative Feedback Loop – in the above example – would be when there is initial activity of panic but yet an authoritative announcement is made where people respond to the announcement and cease panicking.

Thus negative feedback loops occur when an initial situation is cross-checked by an opposite force that results in stability (or a return to normal) instead of increased activity that develops from un-checked activities in positive feedback loops.

In price, positive feedback loops develop from an initial price movement – often on a breakaway from a range or period of consolidation/contraction (negative feedback) – and then are sustained due to both sides (buyers and sellers) taking the same action for different reasons (one to make money; the other to stop losing money.

In the case of price moving higher in a positive feedback loop, an initial price breakout…

• causes those who are short to cover, which is a buying activity, which…
• triggers buy signals for bulls who either add to existing positions or else put on new positions, which…
• triggers those ’stubborn’ short-sellers (with wider stops) to buy-back to cover, which…
• excites more buyers to step in, again adding to positions or putting on new ones…

all of which leads to a perpetual upside trend or impulsive rally that develops a Positive Feedback Loop.

The feedback loop tends to end in one of two ways:

• All bulls who wanted to buy have all been filled (and are long)
• All bears who needed to buy-back to cover have exited their positions.

That’s an oversimplification, but it’s a good starting place to think about feedback loops in price.

Here are three prior Daily Chart examples of persistent Feedback Loops in the S&P 500:

 

 

I’m showing three smaller Positive Feedback Loop (trend) periods from the recent action.

Keep in mind that Positive Feedback Loops develop to the downside as well – the panic example above is a good illustration how some buyers initially rush for the exits which emboldens short sellers, and as price falls lower, more buyers rush for the exits – this impulse took the S&P 500 from 1,350 to 1,100 in about 12 days – where all but one of those days were down days.

October 2011 and January 2012 show us classic examples of Positive Feedback Loops in impulsive, one-directional day-over-day rallies.

Two other periods show similar characteristics, though on a larger scale:

 

 

During the second round of Quantitative Easing (announcement and official implementation), price developed an initial impulse beginning in September that ended in November, and a second sustained trend move developed from December.

This was a similar situation to what occurred during the first round of Quantitative Easing in 2009:

 

 

From the March 2009 low, price developed a sustained Positive Feedback Loop that propelled price from 666 to 950.

We can see a slight Negative Feedback Loop (consolidation) that developed in the middle of 2009 which gave-way also in August to another Positive Feedback Loop on the break to new recovery highs above 950 then 1,000.

Those who were short above these levels were forced to buy-back to cover, which emboldened more bulls to put on new positions or else add to existing positions in the context of a sustained, upward march higher.

One of the basic principles of Technical Analysis is that trends, once established, tend to have greater odds of continuing than of sudden reversals, which builds on the concept of Positive Feedback Loops.

Keep in mind that Feedback Loops occur on all timeframes as different traders interact with various trading tactics and strategies.

In general, it tips the odds to make it easier for traders to trade in the direction of feedback loops instead of against them.

Continue to study this topic for additional insights of how you can apply it to your own trading.

Here’s a few prior blog posts for more information on this concept and how to trade it:

• Quick Lesson from Intraday Creeper Trend Moves
• A Lesson from Creeper Intraday Trend Moves with Divergences
• July 11, 2011 “Making Sense of Current Range Behavior”
• Textbook Triangle Trade Example in Crude Oil (tactics)
• Higher Timeframes Lessons from the Breakout in Silver (Aug. 7, 2011)
• Popped Stops and History Repeating (during January 2011)
• Sep. 20, 2011 “SPX Breakout Trading Tips – Is this Really it?” (yes)
• Lessons from Failed Sell Signals and Popped Stops
• Opportunities from Popped Stops Intraday

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Amazon (AMZN) Chart on Two Timeframes

By Corey Rosenbloom | January 25, 2012 | 6:36 AM |  0 CommentsTweet This

Amazon’s (AMZN) chart structure is creating an interesting breaking point of tension between the higher and lower timeframes.

While the daily chart argues for potential reversal higher, the weekly chart shows a barrier of overhead resistance that must be broken before a reversal higher can take place.

It’s a good example of how to incorporate two timeframes in real-time, so let’s take a look at AMZN:

 

 

Keeping the description focused on combining two timeframes, the Daily Chart shows the odds hinting at a possible upward bullish reversal.

This structure is due to a lengthy positive momentum divergence and the bullish reversal candle off $170 in late December.

Price then broke above both the falling 20 and 50 day EMAs accordingly (green arrows) yet fell shy of testing the 200d SMA and ’round number’ resistance at $200 per share.

In simple terms, Amazon would be seen as a buy for potential reversal on a firm breakthrough above $200 – initial targets would include $220 and higher in the context of “open air” above $200.

But not so fast!

Before we get excited from the bullish side, let’s look at a barrier overhead via the Weekly Chart:

 

 

The Weekly Chart suggests a different picture – or at least that we need to put the potential daily chart reversal in a larger context.

This is the type of discussion we’ll have in my upcoming live webinar on “Two-Timeframe Trading Tactics” with Mirus Futures on January 31st.

One of the topics will be how to put smaller timeframes in the context of larger timeframe levels or key points that you might otherwise miss on the lower frames.

Amazon gives us a good real-time example of this topic.

While the Daily Chart lays the foundation for a potential bullish reversal and break higher, the Weekly Chart makes the $195 to $200 level all the more important in terms of structure and trading expectations.

That’s because we see a breakdown in structure (trend) and both the 20 and 50 EMAs (indicator structure) on the Weekly Chart which gives us a confluence resistance barrier from $195 to $200.

Due to the confluence resistance – and seemingly bearish tone of the weekly chart – it makes any actual (real-time) break firmly above $200 all the more important in terms of a reversal of trend and structure to the bullish side.

Yet in the absence of any firm break above $200, we’ll be looking for the bigger picture’s bearish structure to weigh down (or invalidate) any lower timeframe early reversal signs we’re seeing.

Summing up as simple as possible, from an objective game-plan trading standpoint:

AMZN becomes very bullish structurally above $200; cautious to bearish under $200; and bearish for higher timeframe breakdown under the recent $170 swing low.

These can be used to develop short-term strategies as price trades around – or breaks through – these levels.

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Something's Gotta Give

By Corey Rosenbloom | January 19, 2012 | 9:01 AM |  0 CommentsTweet This

If you use Intermarket or Cross-Market Analysis in your trading or investment decisions, you’ve probably noticed something very strange over the last few months.

Let’s take a look at “What’s Going Wrong” from a classic Intermarket perspective which leads us to “What’s Gotta Give” in terms of a building reversal.

First, the closer perspective of five Cross-Market quick charts:

 

 

In terms of Cross-Market Analysis, it’s best to group the broad markets into four components:  Stocks/Equities, Bonds/Treasuries, Commodities, and Currencies.

This can be done in a number of ways using various Index symbols or popular ETFs.

From this, you can view various trends and then break each market down into individual components for clearer trading opportunities.

But for this post, I want to focus on the difference between “Risk-Off” Markets or defensive markets such as US Treasuries (Bonds) with the US Dollar Index and the “Risk-On” or offensive markets such as Commodities (Gold and Crude Oil above) and of course Stocks.

Risk-Off (defensive) and Risk-On (offensive) Markets tend to move opposite each other in terms of their trends… but that’s not what’s happening currently which warrants our attention.

In the line chart above, we see ALL markets (except for Gold) rising from the September or October lows to the current January highs.

In fact, these creeping uptrends leap off the charts at us, which brings us to the dilemma:

Why are all markets rising and what does it mean?

When will one or more of these markets reverse back to “normal?”

The answer is beyond the scope of this post but it merits further attention.

From a quick price perspective, here are the current resistance levels to watch:

• 1,300 for the S&P 500
• $103 for Crude Oil
• $1,700 for Gold
• 131 for 10-Year Notes
• 81.50 in the US Dollar Index

Would it be possible for all markets to break above their respective resistance levels?  Yes, anything could happen, but that would be the lower-probability (and some would say “very unlikely”) outcome.

The classical thinking would be that either the Risk-On markets fail to overcome resistance and reverse lower, boosting Risk-Off assets above their resistance, or vice versa (Risk-Off Markets boost higher, reversing Risk-On Markets).

Here’s a longer perspective Cross-Market Line Chart from 2011 to present:

 

 

Watch these markets, as well as larger perspectives/timeframes, in the context of classical “Risk-On” and “Risk-Off” parameters.

Mark Douglas in his popular book Trading in the Zone reminds us that “Anything Can Happen” in the markets, but given the critical resistance levels and creeper (divergent) rallies into respective resistance, one has to assume that “Something’s Gotta Give (reverse)” soon.

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