Give me Two reasons
I like to trade divergences, but I’ve been burned often enough that I normally require a second reason to enter a trade. Although today’s upside gap had some markets making a nice move, the Russell 2000 couldn’t exceed it’s first 3-minute bar. After the initial move up, the Russell and the SOX (semiconductors) lead the market down for the first hour.
As we approached yesterday’s low there was a clear DIVERGENCE setup and two reasons to trade — support from yesterday’s price action (the low), and the divergence. Divergence trades sometimes require more patience than other types of reversals, either by having relatively deep pullbacks or, as in this case, the sideways pattern between 8:30 and 9:30 (Pacific.)
But if you were able to wait it out, the move ended at a nice Fibonacci external retracement (white arrows.) The move from the bottom to the mid-session turn was 1.618 times the drop from the open. I always consider the range from 1.27% to 1.618% as a potential turn zone and use a close trailing stop.
By 10:30 we had a nice pullback to my longer moving average combined with a Stochastic oversold condition - two reasons to trade. On this kind of entry I don’t expect a deep pullback, so I exited for a loss. And didn’t re-enter on the divergence that followed. A stop below the first pivot would have kept you in the trade, but that doesn’t match my trading style.
The market’s rise ended at another common Fibonacci measurement — this time an extension rather than a retracement. Notice the general pattern for the day, where the first rally moves at a steeper angle than the second. When this happens, the second rally is often a 0.618 measurement of the first. It looks like it missed by two ticks.
