Lesson: The Four Early Warning Signals Given Before the Afternoon Reversal
Sat, Aug 7, 0:31 AM ET, by Corey Rosenbloom
Were there chart signals the market gave ahead of the afternoon reversal and breakout into the close after the morning Jobs Report drop? Absolutely – it turns out there were at least four early signs that odds had shifted away from the bears and towards the bulls which was confirmed with the afternoon breakout. I wanted to share a lesson I shared in tonight’s Idealized Trades report – the four chart signals that warned of a likely turnaround in the market. These are classic technical signs that can signal a potential change in trend and it’s important to know them. Let’s start with the 5-min @ES (S&P 500 e-mini futures contract – similar to the SPY ETF) chart: 
(click for full-size image) What I do in the first section of each night’s report for members is teach applicable trading lessons from the current day’s activity for use when these signals/trades appear in the future. Let’s start with the four signals I’ve identified that the market gave in advance of the afternoon breakout – which could have given you ample warning to exit your intraday short-sales and/or get long to play the breakout as it developed. 1. Failed Impulse Sell Generally, after a market makes a new price, momentum, and TICK (market internals) low, we would expect lower prices yet to come. A good trade set-up – that I call the “Impulse Sell” – occurs when price rallies into resistance after a sharp downward thrust. We expect lower prices ahead. However, when a high-probability trade set-up fails – as happened in this case when the market traded lower but did not retest the session low – then that is an initial sign of hidden bullish strength that the bulls ‘thwarted’ or busted a classic sell signal. That’s not enough to expect a reversal, but it is the first clue that “Things may not be as bearish as they seem” or “Bulls may be stronger than the chart is revealing – as they just busted a sell set-up.” 2. Rounded Reversal Formation In the reports, I define three types of intraday structures: Trend Day, Range Day, and Rounded Reversal. Rounded Reversals are the ‘enemy’ of trend days. You can also think of it as a “Scallop” or “Arc” pattern, but when price takes on the form of a rounded arc, I call this a “Rounded Reversal” and it has bullish implications of a slow but steady/stable reversal. I drew a green arc under price to show the curvature of the market that also showed hidden bullish strength building. 3. “Kick-off” Sign of Strength We monitor TICK in relation to price highs and lows for confirmation/non-confirmation. TICK should roughly mirror what’s happening in price. Anything unusual – like a divergence – sends a signal. A “Kick-off” occurs when the TICK makes a new intraday high while price is NOT making an intraday high – and the further price is away from making a new intraday high, the more powerful the Kick-off Signal is. Look at #3 at 1:30 CST (13:30). I created an indicator to overlay TICK highs on the price chart, as revealed by little green dots. It helps me see the signal better to spot divergences and Kick-off signals – like this. If you look only at price, you would say “Oh – price is making a new swing high” but if you compare to TICK, you see yet another “Hidden Sign of Strength” as TICK pushed up to a new high on the session. That is a very blatant sign of strength that many traders miss – and it is a very powerful signal that odds strongly favor higher prices yet to come. 4. Bollinger Band and 50 period EMA Breakout I’m not sure this gave you much of a ‘warning’ but it was the final signal needed – the final nail in the bearish coffin for the day – that odds strongly favored a reversal. This was your execution signal to get long – or take your stop-losses if you remained in an intraday short-sale position. In a very strong candle, price sliced through the upper Bollinger Band and 50 period EMA (blue line) at 1:50 CST. You can get long on the break to new swing price highs to play for a bullish breakout to materialize – I call this a Positive Feedback Loop because short-sellers are rushing to the exits to stop-out and buyers are now trading long for the breakout. We would thus expect price to rally higher as long as the positive feedback loop was in effect – and when they form, they can often go longer than expected – and in this case boosting the market almost all the way to break-even on the session. Again, these are the kind of lessons and examples I consistently teach/describe each day in the daily subscriber reports. Lessons like this can mean the difference in holding stubbornly short after price broke-out into the afternoon session, or playing long to profit from the breakout. The market gave signals and created a narrative of hidden bullish strength… that culminated with a powerful breakout in the close. Corey Rosenbloom, CMT
Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade
 blog.afraidtotrade.com
SDI Glossary: "Breakout" Definition
SDI Glossary: "price" Definition
SDI Glossary: "TA" Definition
SDI Glossary: "TICK" Definition
SDI Glossary: "Trend" Definition
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