Four Ways to Spot an Intraday Market Reversal Before It Happens

08/09/2010 11:41 am EST


Corey Rosenbloom

Founder and President, Afraid to Trade

Were there chart signals the market gave ahead of the afternoon reversal and breakout into the close after the morning jobs report drop?

Absolutely! It turns out there were at least four early signs that odds had shifted away from the bears and towards the bulls, which was confirmed with the afternoon breakout.

Here are four chart signals that warned of a likely turnaround in the market. These are classic technical signs that can signal a potential change in trend, and it’s important to know them.

Let’s start with the five-minute @ES (S&P 500 e-mini futures contract—similar to the SPY ETF) chart:

Click to Enlarge

What I do in the first section of each night’s report for members is teach applicable trading lessons from the current day’s activity for use when these signals/trades appear in the future.

Let’s start with the four signals I’ve identified that the market gave in advance of the afternoon breakout, which could have given you ample warning to exit your intraday short sales and/or get long to play the breakout as it developed.

1) Failed Impulse Sell

Generally, after a market makes a new price, momentum, and TICK (market internals) low, we would expect lower prices yet to come. A good trade setup—which I call the “impulse sell”—occurs when price rallies into resistance after a sharp downward thrust. We expect lower prices ahead.

However, when a high-probability trade setup fails—as happened in this case when the market traded lower but did not retest the session low—then that is an initial sign of hidden bullish strength that the bulls thwarted, or busted, a classic sell signal.

That’s not enough to expect a reversal, but it is the first clue that things may not be as bearish as they seem, or the bulls may be stronger than the chart is revealing because they just busted a sell setup.

2) Rounded Reversal Formation

In the reports, I define three types of intraday structures: Trend day, range day, and rounded reversal. Rounded reversals are the enemies of trend days.

You can also think of it as a “scallop,” or arc pattern, but when price takes on the form of a rounded arc, I call this a “rounded reversal” and it has bullish implications of a slow but steady/stable reversal.

I drew a green arc under price to show the curvature of the market that also showed hidden bullish strength building.

3) “Kickoff” Sign of Strength

We monitor TICK in relation to price highs and lows for confirmation/non-confirmation. TICK should roughly mirror what’s happening in price. Anything unusual—like a divergence—sends a signal.

A “kickoff” occurs when the TICK makes a new intraday high while price is not making an intraday high—and the further price is away from making a new intraday high, the more powerful the kickoff signal is.

Look at #3 at 1:30 CST (13:30). I created an indicator to overlay TICK highs on the price chart, as revealed by little green dots. It helps me see the signal better to spot divergences and kickoff signals, like this.

If you look only at price, you would say “Oh, price is making a new swing high,” but if you compare to TICK, you see yet another hidden sign of strength as TICK pushed up to a new high on the session.

That is a very blatant sign of strength that many traders miss. And it is a very powerful signal that odds strongly favor higher prices yet to come.

4) Bollinger Band and 50-Period EMA Breakout

I’m not sure this gave you much of a warning, but it was the final signal needed. The final nail in the bearish coffin for the day that odds strongly favored a reversal. This was your execution signal to get long—or take your stop losses if you remained in an intraday short-sale position.

In a very strong candle, price sliced through the upper Bollinger band and 50-period EMA (blue line) at 1:50 CST.  You can get long on the break to new swing price highs to play for a bullish breakout to materialize (I call this a positive feedback loop because short sellers are rushing to the exits to stop out and buyers are now trading long for the breakout).

We would thus expect price to rally higher as long as the positive feedback loop was in effect, and when they form, they can often go longer than expected, in this case boosting the market almost all the way to breakeven on the session.

Again, these are the kinds of lessons and examples I consistently teach/describe each day in the daily subscriber reports.
Lessons like this can mean the difference in holding stubbornly short after price broke out into the afternoon session, or playing long to profit from the breakout.

The market gave signals and created a narrative of hidden bullish strength, which culminated with a powerful breakout in the close.

By Corey Rosenbloom, trader and blogger,

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