Friday, May 30, 2008

Qs, TICK and NYAD divergence

An interesting indicator divergence today that's worth a closer look (2 minute bars).
I like to watch the carry over from the previous day's close on the 10 and 20 MAs on 5 minute bars. This is typically a good indicator of whether the short term trend will continue or whether a pivot high, pivot low has transpired the previous day. Today's TICK and NYAD (I always exclude the first 5 minute bar) continued the downslope which began about 14:20 yesterday. The downslope is most pronounced in the NYAD, which I regard as the better momentum indicator than the TICK, which is more of an impulse monitor.
What's interesting is the divergence between the NYAD and the Qs. The IWM chart (not shown) was a mirror image of both the NYAD and TICK today. I consider that type of positive alignment a precursor for high probability day trades and the Qs divergence to the upside looked like a shorting opportunity once upward momentum stalled (first line of resistance at R1). The bullish pop in the Qs and NYAD at 10:24 (on increasing volume) looked like we might get a bullish move in the overall market. . .but, as is often the case with these pops, there was no follow through and the smart money went to the short side. Case in point: watch the NYAD.
And then there's this little gem on WM this morning.
Here are the 2 and 5 minute charts side by side.
You don't need the TICK or the NYAD to show you the way on this one.
As mentioned above, the 10/20 MAs stay wide apart at the open, suggesting more downside to come. But the interesting indicator is the RSI, which goes to the zero line on the 5 minute and stays there. This is real selling pressure, suggesting institutional selling in progress, and provides a relatively low risk daytrading entry (short), with the goal of exiting on the first sign of relative strength. The trick in using the RSI is not to BUY on the cross up, but on the cross down. The reverse applies with shorts - exit on the cross up, enter on the cross down.
In the WM 5 minute instance above, the RSI crosses above the 30 level at 10:15 and gives us a picture perfect exit for our short.
One problem with daytrading stocks in this price range (>$10) is that although we may get dramatic signal confirmation, the profit potential is typically limited. In this case, a good short entry at 9:38 and cover exit at 10:15 yielded .18 for 39 minutes exposure = 2% return. WM is starting to look like a "broken stock" rather than a bottoming stock and if institutions decide to get bearish, WM may be a casualty with the potential for another 50% down. Tread lightly on this one.

2 comments:

JZ said...

Valuable article.
What do the pink and light blue dot mean in the chart? intraday trading?

Also, could you explain the meaning of green, red and pink line segment's meaning? how to take action based on it?

thanks,

bzbtrader said...

jz,
The cyan and magenta dots are pivot high, pivot low TS Show Me studies, as mentioned on Tuesday. The charts shown today are from Schwab. The red and green segments on the RSI indicator are generated automatically by TS based on indicator support and resistance levels selected and unfortunatly, I don't have time to explain the various ways to interpret the colors. If you have TS, there are a number of embedded Help files that explain the intent. I use the RSI crosses strictly for system trade triggers - a subject I've been pursuing over the past couple weeks on the blog.