SPY Divergence

SPY Divergence

The ZoneTraderPro Divergence indicator can be used on stocks, even though it was designed for the ES futures.  It becomes really interesting because you will get signals in the SPY that you will not in the ES futures.  

The ZoneTraderPro Divergence indicator is made to detect 3 types of divergences.  Those types are regular divergence, accumulation/distribution divergence and special divergence. The most common question about the indicator is when does it print?  This is pretty simple.  You tell the indicator what zigzag you want to use. In the above example the zigzag is set to twenty cents.  This value is matched to the zones.  When you see a zone start to print, that is the bar the indicator will begin to evaluate and give a signal in real time.   

Regular Divergence

Regular divergence is what you expect.  The price is higher but the cumulative delta is lower.  In the picture above, there is a short regular divergence signal labeled BEARISH.  There is a blue BEARISH divergence below that, and that is a Special Divergence that became Non-Divergent.  If a signal becomes non-divergent, it does not disappear from the charts.  This signal is generally not considered a trading signal on the SPY.  The main reason is that you are trading against the trend.

Special Divergence

Special divergence is a signal unique to ZoneTraderPro.  It occurs when there is a divergence from a low to a high, or a high to a low.  So in other words, if we have a rising price, instead of having the expected positive delta, the delta is negative.

As a general rule, we see this in a short trade on the SPY.  It is possible to get a special divergence long trade signal, but it is less common.

Accumulation / Distribution Divergence

This type divergence occurs when shares are being accumulated or distributed.  This signal is based on all trading that occurs between a high to a high, or a low to a low.  It takes into account both limit and market orders.  These trades will have a green ACCUMULATION or a red DISTRIBUTION marker.

As a general rule, we see this in a long trade.  It is possible, but less common to get this for a short signal on the SPY.

BloodHound Background

There is a SharkIndicators BloodHound template on the charts on this page.  They reflect a new template based upon the $VIX and is available to ZoneTraderPro customers.

SPY Divergence Trading Examples

August 10 2020
SPY Chart August 10, 2020

Trading examples are not hard to find.  I have noted 8 key points.  The ES chart is presented below with the correlating key points.  What was happening on the ES chart was the ES futures had made a strong short trend.  There was regular divergence at the low.  Here is the important point.  Price did not reverse at minor resistance and traded to intermediate resistance.  This breaks the short strong trend pattern, and suggests a long reversal.  This is why the special divergence short pattern on the SPY is not taken.  The patterns are important.

The opinions expressed here are my own and do not represent trading advice.

  1. The SPY chart has an accumulation buy signal. The ES chart has a short trend trade, however this is not what was expected. The pattern created favors a long trade.  It’s important to remember that a pattern is just that.  The short trend trade was confirmed with a special divergence SPY short signal, and price traded 2.25 points lower.  But then the SPY and VIX provided real time information, and they were favoring a long trade after the 2.25 point pullback.
  2. A special divergence short signal on the SPY.  Excellent reason to exit a trade and take profits.  The pattern on the ES is now a strong trend reversal and so exiting and expecting a long re-entry is reasonable. A short trade is not advisable because we are in a strong trend reversal.  The VIX template is only showing green.
  3. The SPY chart has an accumulation buy signal. This is an excellent re-entry signal because it is trading with the trend.  An excellent exit is the counter trend resistance zone.

4.  The SPY chart has an accumulation buy signal.  The ES chart has a Strong Trend Reversal buy pattern. The KP2 ratio is a -83, which is an accumulation.  Again the blue counter trend resistance zone would have been a good exit, or when the VIX template goes red nears the current highs.  This was a 7 point pullback. There was no short signal.

5.  The SPY chart has an accumulation buy signal.  The ES chart has an accumulation buy signal.   This is not a pattern trade.  In fact, it is breaking the strong trend pattern as described in trade 1.  You likely had long trading signals 2 points higher on the ES chart.  What you did have was an increasing KP2 ratio. The current KP2 is -135, suggesting even higher buy side limit order accumulation than the previous -83. The result was 11 points to the buy side.

6.  The SPY chart has an accumulation buy signal.  Again we are given an opportunity to add to an existing trade.  The VIX template is also very green.  Price traded 5 points higher from that point.

7 & 8.  You are given two special divergence short signals on the SPY chart.  The signal occurs 7 ticks from the previously set high.  The #7 key point also occurs after the VIX template goes RED.  There will be a ES exhaustion short trade with special divergence good for 4.5 points.

From key point 1 to the high was a 20 point bullish move.

August 10 20 Es
ES Chart August 10, 2020

Now Add VXX Divergence

Vxx Divergences
VXX Chart 9/18/20

I have now placed the divergence indicator on a VXX chart.  The VXX is a tradable stock symbol for the $VIX.  It works the same way as the $VIX.  If the price of the VXX is falling, that is normally BULLISH for the ES futures. If the price of VXX is rising, that is normally BEARISH for the ES futures.

What is interesting is that we have the same tradable divergences that we see on the SPY chart.

This can be used two ways.  The first is by looking at VXX and seeing if we are in a strong trend and taking ES trades when there is a SPY divergence.  For example, on the chart above, there was a strong bullish trend starting about 1315 hours.  During this period there were several SPY divergences illustrated below.

Spy Divergences

Trading Both SPY Divergence and VXX Divergence

This chart above illustrates what happens when we combine the divergence signals. 

The charts below are for the remainder of the day.   It is important to note that the losing trades occurred when the ZoneTraderPro VIX background was advising against the trade.

These repeating patterns occur all day, every day, just as is shown in these charts. 

At the end of the day there were 20 winning patterns against the 2 losers on 9/18/20.

What is super important to remember is this.  ZoneTraderPro is not trying to take every zig and every zag in the market.  What is being illustrated here is the taking of only the best divergence patterns.  In looking at the examples on this page, ask yourself if you were on the right side of the signals.

More Examples from 9/14/20

In the above picture, the first and third losing trades were both longs, that did in fact work.  However they were denoted as a losing trade only because the VXX or the SPY divergence busted before the trade became profitable.  The second losing trade short went favorable for about 1.5 points, then reversed.

Trading ES Divergence with SPY Divergence

Here are some charts over a 2 day period that illustrate trades that occur when you have a combination of SPY divergence and ES divergence.  Several of these trades were denoted as losing, only because SPY divergence became non-divergent.  

I am only highlighting trades if they had special divergence or accumulation / distribution divergence.  I am disregarding trades if they had regular divergence.

The trades illustrated took place over a 2 day period from 9/14 to 9/15/20. 

Using SPY Divergences to Trade ES Futures - Real Time Example

In this video we look at a real time trading example of a SPY divergence used to trade the ES Futures. We also look at the statistics for this trading idea. Join ZoneTraderPro for a NinjaTrader Ecosystem event on 10/15 at 415 EST to illustrate the concepts.

Past performance is not necessarily indicative of future results.