While new traders aren’t encouraged to fight/fade trend in motion, there are specific setups that increase the odds to successfully catching an intraday trend reversal.
Let’s see a few examples from today’s textbook trend reversal:
We started the day with another rally up away from the 2,475 critical pivot (that I’ve correctly been highlighting to members) toward the 2,490 Round Number pivot.
Let’s start our discussion there, a point shy of 2,490’s resistance target.
As price pushed strongly higher – trending up – toward this pivot, look closely at…
- Momentum which spiked at 8:00am PST and and diverged (formed lower highs) and
- NYSE TICK which similarly diverged.
I find persistent Market Internal divergences more important/predictive than momentum divergences but it’s helpful to have both in place when trading a potential reversal.
Nevertheless, divergences make us cautious and less likely to buy a pullback in a rising trend.
Next, Kick-Off Signals developed which further tipped the odds in favor of a reversal.
A Kick-Off occurs when momentum or internals (or both) make a New Session Low (in a rising trend like this) when price is clearly NOT making a new session low.
Note how high price was ABOVE the session low near 2,474 while Momentum and TICK both fired off new intraday lows. That’s a powerful signal most traders miss!
Finally, price broke a rising trendline and the 20 and 50 EMAs crossed bearishly.
The safe short-sale opportunity triggered where I highlighted price beneath the cross-over.
Super aggressive traders could have attempted to short-sell earlier and could have used a tighter stop above 2,490.
Wherever you enter, your stop should be placed above the session high (as you’re playing for a trend reversal – price shouldn’t go back and make a new high. If so, get out).
If the trade becomes successful and price does reverse, hold as long as possible until you see similar bullish reversal signals.
Today, price traded steadily back toward the session low.
I’ll discuss this and more strategy planning for members.
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Corey Rosenbloom, CMT
Afraid to Trade.com
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Corey’s book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).”
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