Monitoring convergence or divergence in internals and correlated instruments is an effective method for gauging market direction.
For Market to continue in the current direction, there should be CONVERGENCE in instruments and internals. For eg, If TICKS made a high, SPREADS should also make a high. Similarly is ES is ticking higher, NQ and YM should also do the same.
EXCEPTION : Sometimes Spreads may exhibit divergence from TICKS , BUT if correlated instruments exhibit convergence, there is a higher probability for market to continue the current direction.
NQ normally exhibit leading characteristics compared to ES and YM. Convergence / Divergence with NQ is an effective indicator for judging market direction.
Market Analysis for April 04 2014
Open: Market GAPed up and started selling off on ES eventually closing the GAP. NQ did GAP up during open but it was an inside range open unlike ES and YM which had an outside range open. Inside range open on NQ was weaker compared to ES and YM, exhibiting Divergence in instruments at open.
1st Sell off: TICKS hardly made any move to -ve side during the sell off indicating lack of support. SPD and NPD made lows BUT NDD (NQ) was unable to hold ZERO (0) line during the sell off.
Price decline on NQ covered 1 -SD from previous day. This was an early indication of sustained selling in NQ.
1st Pull back: When price pullback, ES and YM pulled back close to the Open while NQ was unable to do so and displayed a huge divergence. NQ made a perfect Strategy N short setup. ES gave two opportunities for Strategy A short.
ES Setup Strategy A and IBB trades. Observe divergence with NQ during the 1st pull back. ES pulled back almost to open range whilst NQ was struggling (below).
NQ had huge divergence from open and 2 pull backs. Later a perfect Strategy A setup signaled sell off.
Spreads exhibited divergence. Usually this can be ignored at 300 range and price may grind higher given lack of selling in TICKS during the sell off during Open. BUT divergence in NQ amplified the effect and pointed to weakness in market.
TICKS indicated lack of support for sell off during open. It was very shallow (-200). The pullback made a +800 indicating broader buying. BUT divergence in NQ along with NQ covering SD-1 during sell off indicated weakness in market.