041505
Early this week, I finally finished the Interactive Brokers data collector (currently in beta testing), and was able to get back to watching the markets during the day full time. I saw an interesting setup this morning which I thought would make a good showcase article. Please take a look at the chart below:
This is a 2 minute chart of the E-mini. The blue line is the Natal Forecast, and you can see it projects all the way to the close. This tool is best used to get a large-scale general overview of what the market is going to do. It can invert, so you really pay most of the attention to the times of the turns. The first projected turn is coming up soon, and it means this is the area to start paying attention to the technical tools. Note that the market is clearly rising into our first projected turn at 9:00, so we'd really like to see a top here somewhere. At the time, I also noted that the market was forming a nice rising wedge, as shown by the red trendlines. If we were classical technical analysts, this would turn into a sell signal when the lower trendline was violated.
Let's take a look and see what some of our technical tools were saying at this time...
I've applied the 9-5 Count, Exhaustion Bars 1, and Ultrasmooth momentum indicators. All of these tools are on the default settings. The 9-5 count is a cycle tracker that generates buy signals on blue 9's and sell signals on red 9's. You can see that it just gave us a sell there at the latest high. This happened one bar before our red Exhaustion Bar dot, which is a further sell indication. Lastly, our momentum curve at the bottom of the chart just turned down, confirming a bearish triple divergence signal, which is a very strong indication that this is a top.
Divergence signals occur when the market makes a high, and then a higher high, but momentum makes a high and then a lower high. You can see this on the chart by looking at the first two peaks in the pink momentum curve at the bottom. That alone is a great signal, but in this case, we had the market move up again to test the highs, and the corresponding move in momentum resulted in an even smaller peak than before. That's triple divergence. It's rare, but is extremely accurate. I always pay close attention to these kinds of signals when I see them.
So based on our Natal Forecast we are in the area for a top, and our technical tools all just gave us sell signals within this area. This is a time to be short. If we look ahead on the forecast, we can see that the move is expected to last at least until 10:00, barring any inversions along the way.
Let's fast forward:
The market subsequently dropped 10 points over the next two hours, and ended up forming a bottom in the latter half of our 10:00 - 11:00 window as given by the Natal Forecast. Practically speaking, you'd have at least taken partial profits at around 10:15 with the gold 5 and blue Exhaustion Bar, but the tools were doing their jobs well even though the bottom was a little confusing.
As a matter of fact, you could have gotten short again on a very similar setup at around 12:30. That area is the final Natal Forecast turn of the day, and we had a red Exhaustion Bar combined with bearish momentum divergence there. It wasn't as strong a signal as we had at the high of the day, but was still pretty clear.
A lot of new Wave59 users get a little confused because there are so many tools available, but you really only need to use 4-6 of them in the manner described here. Each tool has a separate job, and they work together in concert. So the Natal Forecast will set up the zones we look to take trades in, then the technical tools trigger us in and out of the trades. If we entered a zone and didn't get technical signals going in the correct direction by at least 2 of our tools, then we'd pass. Similarly, if we had a technical signal that didn't match up with our forecast, we'd also pass, or at least be very cautious about the situation.
All for this installment! Happy Tax Day! ;-).