Looking for short term scalping opportunities on the E-Mini S&P 500 ( ES ) using just simple divergences between the NYSE TICK indicator and price is still one of our favorite techniques.
Divergence signals between the TICK indicator and price occur frequently and good signals can be seen commonly. Due to the nature of the signal we often can get entries that are very close to significant intraday highs and lows and thus good tight stop loss placement is possible.
Divergences between price and the TICK are quite common and sometimes we will see a divergence that occurs half way through a larger move. This is OK though. We’re not looking to capture long moves with this technique. We’re interested in getting in and out of the trade fairly quickly. We’re looking for high probability setups. Let’s go through the steps of what to look for on a long trade. The first step is to find a situation where price has made a lower low. Then we would look at the TICK indicator to see if that indicator is making a higher low. This would signal that the new low in price is likely to be a weak move.
At the end of the article we show a couple of charts showing such a setup. Notice how price makes a lower low but that is not confirmed by the TICK indicator. This gives us a clue that selling maybe drying up.
Because we are looking for periods where the buyers and sellers are running out of steam and looking for reversals, it’s good to only take signals when the TICK indicator is at what can be considered high and low levels. For a long signal it’s good that the first low TICK reading is at least -600. For short signals a TICK reading above 700 is good. This is only for the first low or high of the TICK reading we’re looking at. It is also good to see at least a point in difference between the latest lower low price and the previous low.
Entering a short trade is the exact opposite of the long trade setup. Look for a higher high on the price chart with a lower low on the TICK chart. It is good to look for high TICK values to increase the chances that we also have an overbought situation to go with the divergence. The idea being that we are looking for situations where all the buyers entered their positions on the first high and buying starts to fade by the second higher high. TICK readings on the first high should be above 600.
This technique can be applied to many different markets like the E-Mini Russell 2000 futures & the E-Mini Nasdaq 100 futures as well as the E-Mini S&P 500 which we used in this example. All of the markets behave slightly differently but we are looking for the same setups on each.
In futures articles I will discuss a way to scan for these patterns automatically using some custom strategy code. There are many ways to do this but we will be using the very powerful eSignal software platform and the EFS scripting language to show you how to automate looking for these setups.