A reader last night asked if Point A is a valid $TICK divergence. I don't think that I gave a good answer in the email. I'm more of a morning person. However, it was a good question.
After sleeping on the question and looking at this again, this is my view. Let's compare Point A with Point B. I prefer to see a full up and down $TICK cycle as indicated by the yellow moving average, which is simply a 2-period SMA of the $TICK (H+L+C)/3. At Point A, the cycle is only half completed as the futures is testing a pivot low. Once the cycle has completed, the market has traded down. Therefore, I would say that Point A is not a good divergence signal. Whereas at Point B, the cycle is complete, and the $TICK is showing strength as the Futures is testing a pivot low. This is a much better divergent signal.
An interesting video of trading a reversal can be found on Paul Quillen's web site. At the top of the page click on "Trade Video". Pay attention to the $TICK divergence, the placement of the initial stop, the scaling out of the trade, and the adjustments to a trailing stop. Very instructive. I believe as an added edge, he also uses Elliot wave structure as a signal.
Charles
charles, I am a little unclear about what you mean about the "full up and down cycle of the tick". Can you explain a little further?
ReplyDeletemichael
Hi Michael,
ReplyDeleteOn the 5 minute chart, the market (futures and equity) will experience short-term up and down cycles. You can best see this using the 2-period simple moving average on the $TICK (yellow line on my chart). To get a feel for the short-term momentum, notice what the market is doing every time that it makes a high or low on these short-term cycles. Is it making higher highs and lows or lower highs and lows? Is the futures and $TICK confirming each other or diverging? Most of the time these cycles take 15 to 30 minutes to complete. If you cut the market into 30 minute segments, you will notice that one 30 minute segment is bullish while the next one is bearish creating short-term pivots as it moves up and then down.
Out job as it tests these short-term pivots is to determine if the market is more likely to continue with the longer-term trend or start a new one in the opposite diretion, or just oscillate in a small range. Using the Advance - Decline lines and VIX in conjunction with price movement and $TICK helps to solve the riddle. It is not an easy riddle to solve in the intra-day market, but that is what we strive to do as active traders.
Charles
Michael,
ReplyDeleteIn other words, a complete cycle is a full wave. I call the tops of the waves crests and the bottoms valleys. If you are studying the tests of lows, a full cycle is from one valley to another valley. If you are studying tests of highs, a full cycle is from one crest to another crest.
Charles