Friday’s action concluded with multi-swing positive momentum and internal (TICK) divergences, which forecast the likelihood of a retracement that was expected early in the week… but it looks like we’ve already had the expected – smaller than usual – and now the prevailing downtrend continues.
Let’s take a look:
We’re seeing the 5-min SPY (S&P 500 ETF) as a benchmark, with the 3/10 Oscillator under price and the NYSE TICK in the lower panel.
As I frequently love to highlight, divergences (in momentum and internals) often precede future retracements/reversals, so it’s a good time to take profits and begin planning a potential position in the event that the market does retrace as expected.
The trigger point after a lengthy divergence is often the price breakout above either a trendline or the 50 period EMA as shown above – that was at $113.50 and triggered just before Friday’s close.
We did get a continued retracement as expected… but the ETF rose 50 cents to peak this morning at $114.50 before heading back down in a continuation of what appears to be a very powerful higher timeframe downward bias.
Look closely and you’ll see a mini-negative TICK divergence as we rallied to new intraday highs, when comparing the TICK to Friday. It’s not always ideal to reference the morning TICK to yesterday afternoon’s TICK, but it can be done nonetheless.
Price closed Friday at the $114.00 level with a TICK extreme of 1,257 and then – as expected – rallied to a new swing high of $114.50 but this time on a TICK extreme of 659. That is called a “non-confirmation,” and hints that the odds of further upside action are limited, unless we start to see a ‘pick-up’ in TICK highs.
We didn’t, and price then broke back under the reference levels of the 20 and 50 EMAs along with a mini-trendline that I’ve drawn at $113.50… and then we were back to the prevailing downtrend.
I thought this gives a good example of this concept, how momentum divergences ‘battle’ trends, and how – when you’re putting on a trade – you’re either betting that the trend will reverse, or that it will continue.
I’ll talk more about this and describe the higher timeframe levels to watch in tonight’s Idealized Trades Report for members.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
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