It’s been a while since I’ve highlighted one of my Price Divergence plays so I wanted to go over a few details today. First a quick definition. What I call a Price Divergence is when after a comparatively strong directional rally (or decline), price then enters a correctional phase whereby the momentum indicator that you are using (In my case it is the TRIX) reverts back toward the mean while price barely budges.

Lets take today’s trade as an example. At around 11:28 this morning, the ER2 was trading around 799 and then started to rally to 801.50 (+2.50 points). During this same time, the TRIX rallied from 0 to 1.25 (+.25). For those of you more mathematically minded, you could note that this gives a ratio of (2/1).

Then price went into its corrective phase. At its lowest, price had declined -.80 points off of its most recent high, while the TRIX pulled all the way from its high of 1.25 to 0 for a ratio of (-.64/1).

So if price is moving up by 2 points when the TRIX moves up by 1 and only declining by .64 points when the TRIX moves an equal distance downwards, it points toward an obvious upwards momentum bias. Thus if & when the TRIX reverses back to the upsides, it is likely that price will move a good ways as well.

So this is what sets up the potential for a PD+ play. Then I had to wait for some convergence to corroborate the play. What I got was the following:

1.) 55-tick TRIX Double Bottom
2.) NYSE-TICK Channel breakout
3.) 2-minute + TRIX Hook
4.) 2-minute & 610-tick + Squeeze Play (When red goes to blue)

So entry was a cinch. My only mistake was in only going for a couple ticks as price continued to rally an additional couple of points after I exited with a small profit.

One important thing to note here about Price Divergences is that they are best used in the early stages of a new trend and not after an extended run. I will consider taking the first or second one after a trend change, will typically ignore the third, and start looking for fading or divergence opportunities after that point.

Hope this helps