Three Intraday Signs the Market May Reverse

08/23/2010 11:56 am EST

Focus: STRATEGIES

Corey Rosenbloom

Founder and President, Afraid to Trade

It wasn’t long ago—August 9, to be exact—when I highlighted the exact same concept I’m about to show in this post in regards to the “warning signals” given prior to an afternoon intraday reversal.

Be sure to read my prior lesson post:

Four Ways to Spot an Intraday Market Reversal Before It Happens

With that in mind, let’s look at the intraday SPY (similar structure to the @ES futures contract or other major market ETF/futures contracts) and see how those lessons paid off again today.


Click to Enlarge

Remember, we started the session with a sharp down move that continued from the previous day’s activity.

What were the exact—and repeatable—signs that the market was more likely to reverse than to continue trading lower?

1) Dual Positive Momentum and TICK Divergence

First, we had a dual positive divergence, coming in as shown above from the 3/10 momentum oscillator and NYSE TICK.

Look closely at the push to new intraday lows under $107. While price made a new intraday low, both TICK (look closely) and momentum made higher lows in a classic positive divergence (warning sign).

2.  Hidden TICK Sign of Strength

Next, we had price push up to the 20 EMA, and as price pushed slightly higher—clearly not making a new intraday high—we had TICK form a new intraday peak high (near the 800 level).

I have little green and red dots on both my TICK chart below and SPY (price) chart above to help me see the TICK extremes better so I can spot divergences and new TICK highs/lows clearer.

Notice the two new TICK highs—I call these signs of strength (or hidden signs of strength) that formed at 11:30 am and 12:00pm—when price was not making a new high.

That’s another early warning sign of a likely trend reversal.

3.  EMA Price Breakout (Trigger)

Finally, we had the actual confirmation—via price—with a breakout above the 50 EMA (blue) and short-term horizontal resistance at the $107.30 level.

Notice the price compression that took place before the breakout as price was trapped between the 20 and 50 EMAs. I always find it interesting when that happens. It’s the sign of a likely breakout yet to come.

From the price breakout, we had a rally—then second consolidation—into the close.

Let’s review:
1) Positive dual TICK and momentum divergence
2) Hidden TICK sign of strength
3) Price break above 50 EMA and resistance

Look for those three signals (technically, two signals: The divergence and the sign of strength) to form and look for the confirmation (step 3) to come via price.

It’s another lesson of the importance of active trade management (if you were strongly short this morning) and how bias can blind you to evidence to the contrary; in this case, classic bullish early warning signals.

By Corey Rosenbloom, trader and blogger, AfraidToTrade.com

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