Divergence Setups at S/R Zones

I posted several charts on Twitter today showing some of the Divergence setups at the EMiniPlayer Support/Resistance Zones. In case you missed them, here are direct links to the charts (listed by time of day):

Positive Divergence at Support

Positive Divergence at Support

Positive Divergence at Support

Negative Divergence at Resistance (Broken Support)

Positive Divergence on Rotation Back Into Support

Friday 03/19/2010 - E-Mini S&P 500 Futures Review/Analysis

E-Mini S&P 500 Futures (Options Expiration / Quadruple Witching)
Trading on Friday was great! The Key Levels and Scenario posted the night before played out very well. I posted "A reversal of the overnight trend is something to watch out for at the cash open" and we reversed the overnight up move at the cash open. If you check the Day Session Volume Profile Chart I've been posting since Tuesday, you'll see I was anticipating a test of the 1150.25-1151.75 Area which we finally got on Friday.

I noticed several complaints on Twitter/StockTwits of failed TICK Divergence setups on Friday. I typically only act on TICK divergences that occur at the Key Areas I post every night. I've annotated my 1-minute TICK/ES chart below, and I hope it provides you with some insight and helps you identify better setups in the future. That being said, keep in mind that nothing works 100% of the time. Secondly, a TICK Divergence shouldn't be the only reason to enter a trade. I typically look for a minimum of two reasons to initiate a trade; but ideally there are three reasons to enter a trade. So my only other recommendation would be make sure you have at least one other reason to enter the trade besides a TICK Divergence.

Enjoy the rest of your weekend and best trading!

ES/NYSE TICK 1-Minute Chart (Morning Session)


ES/NYSE TICK 1-Minute Chart (Afternoon Session)


ES 5-Minute Chart


ES 30-Min Volume Profile Chart


ES Day Session Volume Profile Chart

Monday 03/15/2010 - E-Mini S&P 500 Futures Review/Analysis

E-Mini S&P 500 Futures Review/Analysis
As I posted on Twitter, the plan for Monday morning was to Short the bounces into the Key Resistance Zones which worked out great. Price was unable to fill the gap off the open, and paused at the Initial Resistance Zone. It then went on to make a lower low. Initiating a Short on the retrace back up was the safer trade, IMO. Trade was better facilitated at lower prices right from the open. On the down move, Price quickly rejected 1136.50-1137.50 (Low Volume Area, 36.75 was my Bull/Bear Line in Sand), and began building value above 1137.50 for remainder of the day. We began seeing more aggressive buyers come in to the market after 2 PM (CT). The NYSE TICK provided some nice entries in the Key S/R Areas. I was talking to a friend earlier today about the benefits of doing your homework and identifying areas to do business, and one of the key benefits is that it keeps you from over trading and opening trades in the middle (chop) area. If you're a new trader and still learning to navigate the markets, you can significantly reduce your risk by simply initiating trades at the Key Levels. I personally use a 6 tick max stop-loss, but if you're new and need some more wiggle room, a 2-3 point stop would work fine as well. Use the Key Levels and fine-tune the entry using the NYSE TICK. Check the 2-minute ES/NYSE TICK chart below highlighting some Divergence setups (note: I use 1-minute ES/NYSE TICK chart in my trading). ES filled Friday's gap near the close. We closed on strength near the high of day, so price action is bullish going into tomorrow's FOMC Announcement, which could provide direction on the next swing.

ES/NYSE TICK 2-Min Chart


ES 5-Minute Chart


ES 30-Min Volume Profile Chart


ES Day Session Volume Profile Chart

Thursday 02/25/2010 - E-Mini S&P 500 Futures Review/Analysis & A Word on NYSE TICK

E-Mini S&P 500 Futures Review/Analysis
What a day -- the ES fell 17 handles from the overnight high of 1101.50, and did a complete reversal, and then some, hitting a high of 1103 (+18.5 points from Low of Day) and closing on strength at 1102.25. Unbelievable day, and no doubt a lot of Shorts got squeezed, but there were some hints that kept me on the right side of the market. At 9:40 AM (cst), I posted "Doesn't 'feel' like a trend down day (yet)" and at 11:56 AM (cst), I posted "1087.75-1088 = Support", and began scalping ES on the Long side -- Bear in mind, I still kept my risk on the Longs very tight because the way I was reading the market, a break of 1087 could have resulted in a swift move down to 1084-1085. Between 10:40 and 10:56 AM (cst), ES attempted to test the 1084.50 Low of Day, and failed to do so (hint #1). From 11:08 AM (cst), price remained above the day session mid-point and VWAP (hint #2). After 11:40 AM (cst), Price continued to test and poke above the IB High (hint #3). Looking at the 30-Minute Volume Profile chart, I was seeing acceptance in the 1087.25-1088.25 area (hint #4). By the way, none of what I'm posting here is hindsight analysis; all of this was observed and acted upon in real-time. If you noticed something in real-time that I haven't covered here, please post it in the Comments.

A Word on NYSE TICK
A lot of traders use the NYSE TICK in their trading, and a popular strategy is to fade the TICK extremes (Sell +1200 readings, Buy -1200 readings) and to identify divergences (price makes lower low while TICK makes higher low, etc). Blindly entering trades on TICK Divergences or TICK Extremes is not a viable strategy, and may eventually frustrate you to the point where you ditch the NYSE TICK all together -- which IMHO, would be a mistake because I believe the NYSE TICK is a valuable measure of broader market participation. One of the Keys to using the TICK is to be aware of the Context and the Significant support/resistance areas, and then identify divergences or extremes once price reaches a pre-defined support/resistance area. Check out the 2-minute chart of the ES and NYSE TICK below. Notice how we got a TICK Extreme at 12:50 PM (cst) -- TICK hit a high of +1258, while price hit a high of 1092.50. If you blindly shorted there (I'm sure several traders did), you got stopped out pretty quickly (I'm assuming you use stops). Now move a few bars to the right, and you'll notice another TICK Extreme at 1:02 PM (cst) -- TICK hit a high of 1299 while price hit a high of 1098.50. What's the difference between the two extremes? Look at the Volume! Exhaustion moves happen on High Volume as traders on the other side get flushed out of their positions. This is a TICK Extreme fade trade that could have been taken (I shorted this area and covered at 1096). Trading the TICK is certainly not a science, and more of an Art and like every other indicator or piece of market information, it requires screen time. With enough screen time, you could internalize the patterns of the TICK, and develop a "feel" -- this is difficult to quantify, but in the end, it could keep you out of losing trades or give you a heads-up when the market isn't behaving the way it normally does. I hope you found this information to be of some value, and that it helps you to stay on the right side of the market. At the very least, I hope you won't blindly fade the TICK Extremes.

ES/NYSE TICK 2-Minute Chart


ES 5-Minute Chart


ES 30-Min Volume Profile Chart


ES Day Session Volume Profile Chart

Friday 06/05/09 - Short Day For Me

Busy with several errands today (wrapping up the remodeling of my condo in downtown Chicago), so was distracted most of the morning with phone calls, and was in/out of my home office so missed that nice short setup. Have to head to the city now. Made a tiny +3 pts, even though I was short at 950 before the big drop, and Long at 940.25 before the retracement back up. At least I was right directionally. I'll probably update this post later tonight with some updated charts, etc.



ES/$TICK (1-Min)


ES (5-Min)

Tuesday 03/17/09 - Back to Basics

Even though today was an up day for me (+$325 on ES and +$25 on NQ), the trading was actually pretty bad. Way too many counter-trend trades. I think the small 6-tick stops give me the false illusion that I'm taking "low-risk" trades, when in fact, there's a high probability of the stop-loss being hit, and the only reason the stop-loss doesn't get hit is because I'm bailing on the trade for +3-4 ticks, which doesn't even meet my risk/reward requirement. I think I developed this "problem" when I was working full-time and figured scalping was the only way to extract some quick profits, but now that I can focus on the market full-time, I need to change things around and get back to basics: trade in direction of trend, and stick with an absolute minimum of 1:2 risk:reward ratio. Trading the NQ was also a mistake since I ended up missing setups on ES, which produces bigger gains (and losses) quickly. As far as the stats go, my win rate today was 58% with the winners being slightly larger than the losers. Unacceptable. Here's the plan going forward:

1. Identify trend on 3 min and/or 5 min charts.
2. Trade only in direction of trend. This is going to be tough since I have a natural tendency to trade counter-trend. This would work out if I had a big account and a seat on the CME, but I don't have either of those, so I need to shoot for bigger profits and be more efficient with my trades (less trades, for larger gains). 2 points will be my max stop-loss. Bigger gains shouldn't mean sloppy entries.
3. Shoot for a minimum 1:2 risk/reward ratio. Preferrably 1:3

I may not trade rest of the week or trade VERY lightly since I need to finish my final project for class by this Friday, as well as the IT project for my client. But I'll still continue to make a new post every evening with the regular charts and will be updating the Gap Tracker post as well.

On to the charts...

ES 610-tickbar (Morning Trades)


ES 610-tickbar (Afternoon Trades)


I really didn't think ES would take out yesterday's high of day, but I guess this is what happens when too many people (in this case, shorts) are caught on the wrong side and have to liquidate their positions.

TradeStation Performance Summary


Gap filled at Open


ES/$TICK (3-Min)

Thursday 03/12/09 - Know thyself

In several posts, I've written how I need to put my bias aside and trade what I see, and yet I was unable to do that today. I began the day by shorting the bounces, and was down -$100 in the morning. I *knew* a break-out was in the mix at the 732 level in the morning, but thanks to my short bias, my brain was unwilling to *act* upon that knowledge. This is where knowing yourself and your weaknesses comes into the picture. I knew that I was trading my bias and not the charts, and knowing that weakness helped me keep my losses very small; I was using 2-4 tick stops. In the past, I would be down $500-1000 on a day like today. Instead I ended the day with a +$175 gain with zero long positions and a little bit of luck.

We closed on strength today but I am expecting a re-test of lower levels before we move any higher. Btw, I was trading the March contract today, but have switched over to the June contract for tomorrow.

ES 133-tickbar chart (Morning Trades)


ES 133-tickbar chart (Afternoon Trades)

I got stuck in a short position in the afternoon. I wanted to exit for a +2 point gain a couple of times, but Tradestation kept throwing an error message (pictured above). This emphasizes the use of OCO bracket orders. I have my platform setup to automatically submit a bracket order (1 stop-market 6 ticks from entry and 1-limit at profit target 12 ticks from entry). I think I got lucky on this one and my profit target was hit just before price shot off to higher levels.

The following chart shows why I would short the double-top on price ($tick divergence) and why I should have reversed to a long (higher low on $tick)

ES/$TICK (1-min) at 2:30 PM central


No Gap Today


ES/$TICK (3-Min) $TICK remained above zero all day indicating a strong trend day.

Wed. 03/04/09 - Must be aware of News

Today's lesson is to be aware of news and economic reports. I always check Econoday the night before to make note of news/economic reports but I forget about them by the time I get to work. I think it's because I boot up and immediately have to focus on my day job, and trading is secondary. I need to get in the habit of checking the Econoday calendar in the morning when I get to the office. Today was the second day where I started the morning with a 12 pt loss. That fired me up a bit, and I was able to turn it around to a +5.50 pt gain (17.5 pt reversal) by shorting the 710 area late in the morning. The earlier loss was also because I got called into several impromptu meetings and was unable to manage the position taking full 6-8 tick stop-outs. Usually my max loss is 6-8 ticks, but I assess the market conditions and usually exit with a smaller loss (3-4 ticks).

I was busy in the afternoon so couldn't even watch the market, but I want to share this TICK divergence setup which presented itself around 2:30 PM (central). I'll let the charts below do most of the talking, but here's why I would have shorted this:
1. TICK Divergence: Price made a double-top, and the TICK MAs made a lower high
2. Price was stretched out and over-extended at 2x 1st Hr High Range, and per my Rules, a mean reversion trade can be taken in those extended areas.
3. The red bars on the TICK indicate TICK extremes of over 1150, and the yellow bars indicate TICK extremes of 1000-1149. As you can see, on the first push up to 723 area, we see a lot of red bars fire, but on the 2nd push up, we see only a couple of yellow bars fire. It's just a visual confirmation of the TICK divergence; price is pushing higher on less momentum/strength on the TICK.
4. On-Balance Volume MA turned negative on 610 tick-bar chart
5. Vol Osc turned negative on 610 tick-bar chart

ES/TICK (1-min)


ES 610 Tick-Bar Chart


Open/Unfilled Gap at 689.50
We now have open/unfilled gaps above (733) and below (689.50) today's closing price


ES/TICK (3-min) Price stayed above Mid-Point indicating strength/bullishness


ES Market Balance (5-min Day Session)

Note how the DMI Ratio stayed Green almost all day indicating strength/bullishness during most of the day.

Wed. 02/18/09 - Better than yesterday

Today was definitely better than yesterday. It was clearly a sell day (look at where TICK spent most of its time today), and for the most part, I tried to stay out of longs. I was out of the office in the morning but managed to glance over at the charts in the afternoon for a few trades. Since Matt called me out on using bigger size to make up for a loss yesterday, I took the opposite approach today. Lost money on a 2-lot ES trade and was down -$150, but made it all back and then some (+$100) trading 1 contract.

I have a slightly bullish bias for tomorrow. I think we're gonna be range bound for a few days though. But again, it's a thought, and that's it! Doesn't mean I will trade with a bullish bias. I will trade it as it comes. Every moment in the market is unique, and I don't know sh*t! Trading with that mindset helps manage expectations (as in, I have none). No expectations means little or no disappointment.

I'm sure these TICK trade setups are sounding repetitive by now, but that's the point! Check it out. Here's why you should have sold here: Price couldn't make it back to 1st hour high (weakness), higher high on price, lower high on TICK (divergence) and zero-line reject.


Gap filled by 9:00 AM


ES/TICK (3-min) Look at where TICK is all day. BELOW Zero!


ES Market Balance (5-min Day Session Only)


TF Market Balance (5-min Day Session Only)


TF/TICK (3-min)

Friday 02/13/09 - It's a Trader's Market

Just a reminder that I am updating the Gap Tracker post on a daily basis, and as of now, gaps have been filled on the same day 75% of the time!

This is a great market to be trading in. I personally love trading range-bound days, as long as the range is over 15 points. The ATR over the past 10 trading days has been around 27 points! Beautiful. If, as a day trader, you can't extract a few points from a 27-point day, you need to reassess your trading setups because there are plenty of opportunities on the long and short side in this market. On this end, I stayed on the Sim again and managed to eek out a $600 gain with a few trades. I can't emphasize enough the importantance of having a positive risk/reward ratio, with the minimum being 1:2 (risk:reward). I started the day with a gain, but gave it all back over the next 2 trades. But then on the 4th trade, I made 5 points which made up for the prior 2 losses, and then some. When I looked back at my prior 2 losses, I realized both of the setups did not have 1:2 risk/reward potential so I shouldn't have taken those to begin with, but I got caught up in the momentum and put on those losing trades. The important thing is they didn't do much damage since I was using a 7-tick stop-loss.

The TICK continues to be an excellent indicator. With proper money management (1:2 risk/reward), I'm confident you could make money with just a 1 and 3 min ES/TICK chart. Here's a 1-min chart with a short setup that appeared towards the close. We have negative TICK divergence with a double-top on price (excellent, high-probability setup). I entered short at 830.75 on the spinning top candle.



Gap filled in the morning session (5-min)


ES/TICK (3-min)


ES Market Balance (5-min Day Session Only)


TF Market Balance (5-min Day Session Only)


TF/TICK (3-min)

Wed. 02/04/09 - Tick Divergence Setup

I didn't watch the market in the morning, but was talking to Matt on Yahoo later in the afternoon so pulled up the charts. I spotted a TICK divergence setup with a negative TICK extreme bar firing off right before the spike up from the 828 area. Very nice setup that was good for at least 3-4 points, even with a delayed entry. I started taking screen shots of the 1-minute ES/TICK chart to document the trade setup. Here they are, in sequence:

ES/TICK (1-min) 1:30 PM (central time)


ES/TICK (1-min) 1:33 PM (central time)


ES/TICK (1-min) 1:39 PM (central time)


ES/TICK (1-min) 1:58 PM (central time)


ES/TICK (1-min) 2:41 PM (central time)


I think the charts speak for themselves. The TICK divergence is pretty obvious, and worked out great in the afternoon. We also got a gap fill before 1 PM (central).

Gap Filled at 12:55 PM (central)


ES/TICK (3-min)


ES Market Balance (5-min Continuous Contract)


ES Market Balance (5-min Day Session Only)


TF Market Balance (5-min Day Session Only)


TF/TICK (3-min)