Example Divergence Trade: Netflix (NASDAQ: NFLX)

October 23, 2017

Here’s a divergence trade I took last week in $NFLX, using the Multi-Divergence indicator in my trade plan. 

The setup: NFLX announced earnings on Oct 16.  Price made an all-time high.  I looked at the chart and saw a big divergence on the volume-weighted MACD.  The last big divergence in June led to a big drop. So I was looking to get in a bearish position. 

The candle on Oct 17 is the most recent bar on this chart. I saw that the bar had made the all time high and then fallen down below the prior day’s close, which I took as my bearish entry signal with NFLX at $200. 

The plan: $190 looked like a possible support, and a return to $204 would tell me my timing was wrong. I thought this move should happen in the next few days, so I bought the Nov 3 weekly options 197.5/195 put spread for $0.97.  I chose the 197.5 strike instead of the at-the-money 200 strike because it had higher gamma—it would have a larger change in delta with movement if I was right.  If the move didn’t come in the next day or so, I would get out and move on. 

I didn’t have to wait long:

The day ended red and had a good follow through day next. When the 190 support was nearly hit, I went to take profits. I sold for $1.57, which is a return of about 62%.  I love it when a plan comes together (extra Hannibal).

Note that the divergence indicator wasn’t the entry signal—it just provided context to give me an edge.  Divergences can often resolve with a continuation in the trend instead of a reversal. The context combined with the actual reversal behavior in the daily candles was what led me to take a trade. Always have a plan before you trade, and always follow your plan. My failures have come when I don’t do one or both of those things. 

Update: Multi-Divergence Indicator v2 for Think or Swim (MACD, RSI, CCI, On Balance Volume and many more)

October 20, 2017

I’ve made an update to the Multi-Divergence indicator. No more arrows! It’s now a lower histogram that gives you a picture of whether the divergence is increasing or decreasing, and also the size of it relative to all the other divergences on the chart. Here’s an example of it in action for $TSLA (Tesla Inc), along with a plot of Volume Weighted MACD for visualization:

2017-10-20-TOS_CHARTS

The divergences now have a value between 0 and +/- 100. Zero means no divergence is present. A bearish divergence has a negative value while a bullish divergence has a positive value. The scale is determined by the widest divergence, whether bullish or bearish, on the current chart. In this case, the widest divergence came on Sept 15. Everything else is relative to that. If a new divergence comes along that is even larger, then the indicator will scale everything to the new max value.

You can also use this new study as-is in a scan. Just set up a study filter as described below:

Go to the scan tab in Think Desktop, and choose “Stock Hacker”.  Then you click “Add Study Filter” (First in screenshot below) then click the pencil to edit the default filter that is added (Second in screenshot):

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Set the aggregation period at the top to whatever timeframe you are interested in. Then edit the default ADXCrossover() seen here under Condition Wizard:

scan1

Here’s an example of how to set the scan input, looking for bullish divergences of 30 or greater on the Volume Weighted MACD with a divergence length of 20:

scan input

You click in the upper left dropdown and choose “study”, then lookup Pro_MultiDivergence_v2 from the dropdown list. Then you can select the divergence (bulldiv or beardiv) from the Plot dropdown. Under inputs you choose the length and divergence indicator you want.

For a bullish scan: Choose “is greater than or equal to” and set the select condition dropdown at top right to “Value”, and enter your scan value as a positive number.

For a bearish scan: Choose “is less than or equal to” and set the select condition dropdown at top right to “Value”, and enter your scan value as a negative number.

This indicator is in the “Donors Only” section of my Google site under Released ThinkScript Studies. You can become a donor to the blog through PayPal here:

Example RSI Divergence Trade Setup: $TSLA (Tesla Motors Inc.)

February 16, 2017

All indicators are only a method to repackage complex information in a simple and repeatable way.  I have said before that divergence indicators (like my own Multidivergence Indicator) are not good trade signals by themselves. What they are good for is context.  You will still need some entry criteria of your own to decide when to enter a trade.  You should also have a stop and a target identified before entry, which are basically a plan for if you are wrong and a plan for if you are right.

Here’s a trade I did not take, but I saw developing in real time. It becomes a useful case study for a divergence setup in $TSLA that had a positive outcome.

There was a divergence between the high prices and the RSI indicator for a week or two beforehand. By itself, that doesn’t tell you to sell. Price kept pushing higher even in the face of the divergence. The divergence eventually resolved and went away, and the uptrend continued. But it was telling you that in this context, the trend might be getting tired. You could be looking for a reason to sell. If you try to front-run it, you can get destroyed. Bull markets are built on the smoldering bodies of early bears.

Almost everyone saw that big ugly candle in $TSLA the other day, selling off after threatening to move into all time highs. Using the context of the earlier RSI bearish divergence, this candle was another good piece of information. You have several signs pointing to reversal now. One trade plan could have been to sell a break of the low of that candle, with a stop above the candle high just in case you are wrong. Whatever you do, STICK TO THE ORIGINAL STOP LOSS. Stops only move toward profit, never toward more losses. If you were wrong and price had spiked to new highs in the trend you’d eat the 8 points or so and move to the next trade. In case you were right, maybe you set a target to cover around $255 support, or maybe you sell half and let the rest ride until you see a bullish reversal candle. There’s a lot of great options when you are right! That’s the easy part.  

Here’s what happened:

If you had taken the trade, you had a big follow-through day today on the downside, and you’d be sitting on about 10 points of profit.  One more good day and your target could be hit. 

Remember, indicators only give you information. You as the trader have to decide what to do with it, taking into account your psychology, risk tolerance, account size, and all the other fundamentals. 

Multi-Divergence Scan for Think or Swim: MACD, RSI, CCI Divergence in Your Stock Scans

September 13, 2016

In my Multi-Divergence indicator, there is logic used that breaks the study filter when you try to use it in a scan. So I made a new indicator specifically for scanning by limiting it to only use MACD, RSI or CCI. Now it can be used in a watchlist scan, and it’s called “Pro_Divergence_Scan”. It is still a donor-only script, so use your blog donor info to access it in the Released Thinkscript Studies section of the Google site. If you’re not a donor, you can chip in by clicking the Donate button:

Instructions:  Import Pro_Divergence_Scan like any other study, then follow these directions to set up a scan with it.

Go to the scan tab in Think Desktop, and choose “Stock Hacker”.  Then you click “Add Study Filter” (First in screenshot below) then click the pencil to edit the default filter that is added (Second in screenshot):

screen-shot-2016-09-11-at-7-19-25-pm

Delete the default ADXCrossover() if there is one (Third in screenshot) and then click “Thinkscript Editor” (Fourth):

screen-shot-2016-09-11-at-7-19-47-pm

Choose your Aggregation period at the top (D for Daily in this example).  In the editor, type in “Pro_Divergence_Scan()” and then choose “Inspector” from the side panel.  You’ll see the Pro_Divergence_Scan study inputs and the four plots that you can scan for:

    1. BullDivs for Bullish Divergence on short timeframe
    2. BearDivs for Bearish Divergence on short timeframe
    3. BullDivl for Bullish Divergence on long timeframe
    4. BearDivl for Bearish Divergence on long timeframe

 

screen-shot-2016-09-11-at-7-25-30-pm

(As an aside, you can also type the name of any other study you have in your library at this thinkscript editor to get access to it for any filter.)

For the scan to trigger, you want to check for when your chosen plot value is equal to 1, because that’s what I coded the indicator to do.  To do this, add the string “==1” after the plot name, as shown here:

screen-shot-2016-09-11-at-7-25-54-pm

After this, click “Ok” and run your scan.  You may get a pop-up that warns that future changes to the study will not be reflected in this filter.  That just means that if you change the code in the Pro_Divergence_Scan, it won’t be reflected here.  The filter takes a snapshot of the code when you make the filter.  If you update the indicator, just delete the old filter and set it up again as above.

Email Problems

June 22, 2016

If you’ve been trying to reach me, check your spam folders for my replies. My messages seem to not be getting through to people.