Lesson on Intraday Divergence Reversal Signals in Gold

I wanted to follow-up from the post “Lessons from Gold’s Three-Push Divergence into $1,800” from last week with an additional trading example of how to piece together the chart puzzle into a successful low-risk, high probability trade on the very short-term structure.

Let’s take a look at the chart and study the lesson from the “Divergence Plus Trendline Break” Reversal Trade:

Be sure to read my prior commentary on the first trade set-up: The Short-Sale into $1,800 (on dual divergences and a “Three Push” Pattern).

The main idea was that price rallied into the key overhead “Round Number” of $1,800 per ounce on lengthy (multi-swing) negative momentum divergences.

Very aggressive traders like to short-sell INTO higher timeframe resistance, particularly if some sort of divergence (momentum, volume, etc) is present – it’s a low-risk trade in the context of a potential short-term reversal (or at least retracement) against the resistance.

Conservative traders prefer to watch the set-up develop and THEN take a position AFTER price triggers/signals entry on a corresponding price trendline or EMA (moving average) break/cross.

When you’re playing this type of set-up on the short timeframes (intraday like the 5-min chart above), the common question becomes:

“I see where I put on the trade, but where do I exit?”

Let’s keep it simple and discuss the answer:

“When price – in real-time – gives you a similar reversal signal.”

Of course, an alternate method would be playing for a specific price or percentage-gain target (such as $1,750 or $1,700) but let’s take it a step beyond super-simplicity (price level targeting).

If you’re playing a short-term reversal signal, try holding the position until price gives you a similar counter-reversal signal in real-time.

Admittedly, this isn’t as comfortable as trading for a specific target in mind, but it can help you generate a higher potential profit if the price swing has more power in it that takes it beyond a simple price level target.

In this case, let’s assume that we entered short at the red highlighted region which played off the negative dual divergences and inflection down from $1,800 that triggered an entry on the break of the $1,780 region which soon-after resulted in a 20/50 EMA bearish cross-over (August 10th).

We would place our stop-loss above the chart swing high at $1,800 and then play for an indefinite target until price gave us a reversal signal.

Price reversed its trend with a series of sequential lower lows and lower highs (price structure) which eventually resulted in a clear positive multi-swing divergence into the spike to $1,730 on August 12th (Friday).

Divergences are NOT flip-reverse position signals by themselves, but they can be position-exit signals for conservative traders (exit a profitable position into a clear positive momentum divergence with price).

Alternately, a trader can see the divergence but then demand that price break a falling trendline or EMA, which would serve as a trend reversal entry position – similar to the signal generated at the $1,780 short-sale trigger.

The price confirmation – breakthrough signal – occurred at $1,740 which triggered a reversal entry signal and of course exit signal for any remaining short-sale position.

The process starts over again with a reversal BUY signal at $1,740 with a stop-loss now under the $1,730 swing low.

To Summarize:

Let Exit Logic Equal Entry Logic.

If you’re entering a short-term reversal trade with divergences, hold the position until price generates a similar reversal signal in the opposite direction.

Also, it’s worth reviewing the trigger tactics for the Divergence + Price Break Trade:

1. Observe a Multi-Swing Divergence
2. Trade when Price BREAKS through (confirms) a trendline or key EMA (20 or 50 period)
3. Observe the confirmation with a 20/50 EMA Crossover

Remember that this is one among many trading strategies, but it’s worth studying if you’re not familiar with the concept.

Though I’m using gold as a teaching example, this principle tends to work just as well in stocks, ETFs or other futures markets.

Corey Rosenbloom, CMT