Using Divergences to Determine Direction

For all you day-traders out there, the futures market has been offering an easy way to trade intra-day reversals in equities, treasuries, commodities, and currencies. This signal has been pretty accurate, and more importantly, low risk. Our futures trading strategies are market profile based, but these divergences have helped to increase our futures portfolio returns to better than 130%, while giving us an upper hand in picking intra-day market direction.

This set-up has just occured today when using the S&P e-mini futures contract (/ES) in comparison with the Russell 2000 e-mini futures contract (/TF). Take a look at the charts below…

The divergence is activated while stocks are trending higher. Using the two charts above, the S&P prints a new high (taking cash market hours into consideration only) at 10:32 am, while at the same time, the Russell is well off its highs. This non-confirmation in the Russell signals weakness in the move higher in equities, and can serve as an indicator to close a winning long position. It also, upon a simple break of support, offers a signal to short the S&P, which is already off 5 points since marking that intra-day high.

We also track this signal between the Euro (/6E) and Pound (/6B), and also between 10-year (/ZN) and 30-year (/ZB) Treasuries. The times in which these divergences occur is pretty consistent each day, and the risk is easy to manage, using the relative high in the strong suited contract to manage risk.

Regards,

Option Addict