TICK Divergence and a 6.25 point selloff
There was an interesting pattern that occurred on December 2 at 1252 p.m. which illustrates why it is important to understand tick divergence, volume analysis, and the ZoneTraderPro theory.
We first see the market trading heavily within a one point range with the top at 1805.50 which develops into a trend trade which failed. The market traded between the red and green support and resistance zones, which is indicative of an accumulation or distribution pattern and this pattern is described in the trading manual.
Next we see heavy volume at the blue counter trend zone at a price of 1807. There were 9,000 contracts that were bought on market orders at this price level. There was no Tick divergence here as the market traded higher on a higher tick.
The market then traded to the pink strong trend resistance area and touched it exactly. Again there was a tremendous amount of contract volume at that resistance zone. There were 25,000 contracts bought on a market order at this resistance zone. It is important to note that once the tick made its high at 1221 p.m. it began to fall steadily in break the upward trend line. When the tick first reached strong trend resistance it had a value of 536. However when the tick reached and touched strong trend resistance its value was only 13 and this illustrated a strong Tick divergence.
By looking at the tick on the lower indicator on the ZoneTraderPro chart you can see the tick had entered a bearish trend channel leading into the selloff. What is also very important to look at is the number of contracts that were traded at both the blue counter trend resistance zone and at the pink strong trend resistance zone. This is the reason why you get a six-point trade from the divergence. So much of the dumb money had bought contracts while the tick was selling off that the stops were hit on the way down.
Taking a trade at the strong trend resistance zone can be justified due to the high volume of contracts bought on market orders and the divergence in the tick if a tight stop is used. Nothing larger than a six ticks stop can be justified here because of the large amount of contracts that it also been sold on a market order.