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Trading Divergences With The Zero Indicator
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Trading Divergences With The Zero Indicator

by The MoleMarch 29, 2017

Yesterday I received a series of follow up questions regarding what now appears to have been yet another prescient tweet this time depicting a bullish divergence on the Zero. If you are new here and are unfamiliar with the Zero indicator then I recommend that you point your browser to the introduction, the tutorial, and most importantly the video section where you can enjoy dozens of recaps of past E-Mini trading sessions.

Let’s take a step back and talk about the basic premise of why I came up with the Zero indicator and why it continues to be favored by an overwhelming percentage of my subscribers. Some of you have been using it continuously for many years and I think the most loyal subs goes back all the way to 2009! Clearly the Zero seems to be useful but what exactly differentiates it from the myriad of indicators you get for free in your trading platform?

Some History

Many of you enjoy swing trading the E-Mini futures and I am no exception. But even for skilled traders doing so without a deeper understanding of what is driving equity markets can quickly lead you to a series of frustrating losses. Technically speaking the average retail trader of today has direct access to capabilities and execution speeds that our forefathers could only have dreamed of.

However we are all also suffering from a major disadvantage. The increasing proliferation of electronic trading over the past few decades has gradually separated us from what some may call the physical aspects of trading. These days there is very little opportunity to actually expose yourself to a floor of traders and base trades on participation and changes in apparent sentiment among fellow participants.

Although this may sound completely alien to you today, several generations of very successful traders actually never looked at single technical indicator in their entire life and purely based their trading activities on the ‘action’ they perceived among them. The vast majority of these oldtimers didn’t have a clue about charts or technical analysis (it barely even exited at the time) and mostly relied on their intuition and people reading skills (and of course the occasional ‘tip’) to place their positions.

So it’s fair to say that the way our grandparents were trading was fundamentally different. Unlike today everything was happening manually and thus an analog basis. Which meant filling out paper slips or calling your broker who happily would do it for you. These slips then physically were handed to the floor brokers who then would settle small as well as very large trades by shouting at other brokers in combination with a complicated series of hand signals. Watch the clip above for a pretty accurate historical review of how trading was done back in the ‘good ole’ days’.

Stock Tickers

So how did market information get disseminated across the nation and even the rest of the world? After the turn of the 20th century and the establishment of a nationwide electric grid the common practice was to run glorified bucket shops in key locations across the United States (and to some extent in Europe) which were equipped with a slightly modified version of the telegraph.

stock_ticker

It was called the stock ticker and it was a simple mechanical device that received analog electric signals from the exchanges or relay stations and then printed them on a thin roll of paper. What was being printed of course were stock symbols on the first row and their current bids on the second.

ticker_tape

At the end of a trading day cleaning crews would come in and actually clean off all the ticker tape which had accumulated during the session. Sometimes mountains of the stuff were being re-used in ticket tape parades (hence the name), so don’t ever think our grandparents didn’t care about recycling 😉

ticker_tape_parade

One of the intrinsic aspects of running a stock ticker was that it made a lot of noise. We are not talking laser printers here folks, but a rather crude early 20th century mechanical device that at times produced quite a racket. So if young Jesse Livermore was dropping by his local bucket shop he most certainly was able to hear their stock ticker rattle like crazy when there happened to be a lot of trading activity. And even if he showed up late he most likely would have been able to judge the recent amount of activity simply by the heaps of ticker tape that had accumulated on the floor (I’m however uncertain if those were routinely cleaned). So even thousands of miles away in Los Angeles or Seattle an aspiring stock trader would be able to actually get a good glimpse of the floor action all the way over in New York. Of course nothing beats the real thing which meant actually being right there on the floor and being elbowed and pushed aside while fellow traders were screaming on top of each other.

So if you think you have so much better today – think again. Yes, everything is a lot more convenient and quiet these days. Many of us have entered or closed out positions early in the morning in our pijamas or whilst sitting on the toilet (please make sure you scrub your screen with soap afterwards). But all that convenience comes at a price. We are physically removed from observing the ‘action’ – all we are given are dancing candles on a screen. Which ain’t bad and I’m sure Jesse would have given one of his limbs being able to do that in real time. But I’m equally sure he would have missed ‘listening’ to the tape in order to gauge participation, price momentum, a shift in sentiment among participants, the response to an urgent news report, etc..

Visualizing Participation And Momentum

Now pondering all that sometime in late 2008 I experienced some sort of an epiphany and inspired I immediately went to work. My goal was to merge various meta market measures (my secret sauce so don’t ask) into a visual indicator that ‘made a lot of noise’ when there was a surge in participation and remained quiet when there was none. In addition it was also supposed to provide me with sense of market direction: basically how does buying pressure align with selling pressure?

In the following two years it went through a few optimizations and small changes but the core algorithm driving the Zero has remained practically unchanged since its inception. I could think of a few improvements here and there but the basic concept has remained valid since then and has survived many years of some of nastiest and volatile tape in trading history. Short of listening to a floor of traders or a rattling ticker I am able to watch the Zero and still get a pretty good sense of what the market is doing and most importantly if price may be lying to me. I have written many tutorials on the subject and if you are curious to learn more then I once again encourage you to follow the links I posted in the beginning of this article.

Back To The Future

Over the years there have been countless times when the Zero literally saved my butt from either being lured into a losing position or alerted me early to a change in short term market direction. Monday was not unique but it’s a good example of how to asses price action and get positioned accordingly:

Here’s the tweet I posted early that day as well as in the blog’s comment section. I’m actually rather selective before making ‘calls’ like that. For one it’s public and nobody wants to wind up making a series of bad calls. Secondly my readers will most likely take my tweets or comments in consideration and as such I only post it when I myself am ready to pull the trigger. I usually refrain from confusing or haphazard comments which could be misinterpreted. The format of these calls is usually:

  • This is what I see.
  • Why it matters.
  • How/when/where I am going to place a trade.

In general I expect my subscribers to become familiar with the Zero, watch it for a few weeks, and then start interpreting the signals in the context of their own trading activities. I do not know if you’re trading a 5-min, 60-min, daily, or weekly chart. I have no idea what your trading horizon is. I also do not know what your campaign or exit rules are. So when I post my POV on the Zero it is mainly geared toward my own trading activities. Of course if yours happens to be compatible then have at it. Bullish or bearish divergences can become the springboard for short term or long term campaigns. It’s up to you to watch the Zero and interpret it accordingly. It doesn’t tell you when and where to buy – it’s an oscillator that shows you market momentum and participation.

With that in mind let’s take another look at two panels at that moment in time. What stands out in my opinion is the rather pronounced bullish divergence on the hourly (left) panel. The smoothed version is pointing up while price was gapping and still falling. On the 5-min (right) panel we are seeing very little participation which of course can also mean nobody is interested in buying.

Time For Action

What happened in the following hour was some continuation higher followed by a little spike low which didn’t even touch VWAP. Which is where I grabbed a small position – only 0.25% as it was still speculative. Some of you have mentioned that a relatively flat signal usually means sideways tape but that’s not exactly true. A few observations I have gathered over the years you may want to internalize:

  • If price starts moving hard despite low participation (i.e. a flat signal) then it’s most likely driven by institutions. Remember that the Zero only shows you what the tape does (price) and how it’s correlated to momentum and participation (signal). It’s our job to analyze this type of information as building a system around that is extremely difficult (but probably not impossible). For example attempt to define a signal divergence and the right moment to act upon it. Not that easy even for me and that’s just one single type of entry opportunity.
  • When there is low participation and very little movement then odds have it we’re going to see a range bound session. That seems intuitive – when there is no mojo then playing the ranges may actually be most profitable. Why? Because there is less resistance in both ways.
  • On the other hand if the tape drops or ramps hard on a weak signal then fewer participants are driving the tape and there appears to be less resistance against moves in either direction.
  • A ramp or drop on a strong signal is the most reliable and suggests a trend day, especially when it kicks off the day. Often a strong spike on the open is the point of recognition that participants are ready to rock & roll.  It is also when leading divergences are most valuable as a drop in ‘mojo’ with the tape advancing suggests later comers which are ripe for the taking.

Clearly there are a ton of variations in between which is why I have often produced demonstration videos to explain my thinking. But I hope that after reading this post you have a better understanding of the purpose of the Zero indicator and why many of us find it imperative when trading equity ETFs and in particular the futures.

Shameless Plugs Department

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • Mark Shinnick

    Bot some volatility here at its support, tight stop.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • BobbyLow

    Loved the film! It’s amazing how this business has changed from being outside in the weather on the curb of Broad Street with transactions completed with hand signals and paper to taking less than a second to get an order filled over the air through the internet.

  • BobbyLow

    Cought a big bounce to the upside on the Nat Gas Contract Roll overnight. :)

  • ridingwaves

    CL finding some buyers off report

  • Mark Shinnick

    Slithered out of vol for time being.

  • AcoBrasil

    EWZ/BRZU on a tear. I am expecting a gap fill at EWZ $39.50 if $37.75 can break and hold (upper flag line and 50 SMA) and a possible run at a new yearly high.
    IBB looking strong today.

  • BobbyLow

    I don’t know about Crude anymore RW. I just ran a what if on my Daily Slow Mode and if I had used it, I would have gone short at the COB on January 10th and bought SCO at $35.13. SCO just printed $39.04 and my current Stop would still be over $2.00 away on Crude at $51.15. If Crude does catch a bid now this would mean that I would have about a slightly positive or barely Break Even Trade after holding it for 3 Months. I’ve never seen Crude stay in this type of range for so long and as a trend trader this thing has really sucked in 2017. BTW, if I had continued to use my shorter time frames, things would have been much worse as I would have continued to get sliced and diced like I did from Jan 3rd until I stopped trading it in February.

  • Skidmarkalot

    Thanks Mole for the education on how the Zero works, first time I think I actually somewhat understand whats going on. Putting the meanings to the actions opened my eyes and also made me resubscribe to the Zero again.

    Fast

  • randomuser6789

    …And in that “less than a second” to have your order front-run by billion dollar bots who steal pennies at a time from all of us retail rats.

  • ridingwaves

    VRX is a big component of IBB, so now that they cleared Ackman out of that symbol 3 billion dollars less, I think they run it back towards 20 and that would help the IBB a lot…

  • BobbyLow

    This is true. But we still choose to play in this “Den of Thieves” regardless. :)

  • ridingwaves

    I have no say in that trade right now either…..still believe central bankers need it higher to spark inflation of some sort…just read a story on a hedge firm that is buying distressed oil services and producers and up 400% this year..

  • AcoBrasil

    Ah. Good to know.

  • http://www.linkedin.com/in/sharondsessions/ Sharon

    Thanks, Mole. I am working on absorbing all this learning. And, then next week as I begin my new job, to review the market after I get home and look at doing some paper trading while I am working full time. And, then look at real trades after my job ends for the year in July. That is the trading plan that I will follow this year.

    And, look at a good review over the end of the year to assess what happened and make any changes in trading actions before my new work year begins again in April. Paper trade again until July. This is going to be a great year.

  • ridingwaves

    btw-UWT is a 3xbullish CL and it now looks like it has enough volume to play in..

  • Mark Shinnick

    Standing aside miners.

  • BobbyLow

    I’m still short but they’ve been kind of range bound on my hourly for the past few days.

  • BobbyLow

    I think UWT replaced UWTI which was delisted. It’s kind of foggy why they were delisted. Some of it could be because of a total lack of understanding of how these things trade and newbies were buying them for lifetime investments without any clue as to how the Delta worked on a daily basis.

    3X NUGT and DUST are Direxion ETF’s but UGAZ, DGAZ, USLV and DSLV are 3X Velocity ETN’s and there is always room for concern. However, there was almost a month’s notice prior to UWTI’s delisting so one could hope that there would be advanced notice if any of the other ETN’s were going to be delisted. I’ve put a link to the Velocity Shares News Room on the top of my bookmarks for a reminder to check it from time to time.

  • http://evilspeculator.com Sir Mole III

    Trading on top of working can be tough but I’ve been there a bit over eight years ago. But as long as you follow a strict regime and stick to your rules it can be done. We’re here to help.

  • http://evilspeculator.com Sir Mole III

    Ha – expected a bit more of a response. Quiet here – what’s everyone up to?

  • http://evilspeculator.com Sir Mole III

    Tape seems quite a bit less decisive today. Signal is weakening inside a sideways price range. Expect this to continue until an hour before the close. Then we’ll see if we’ll get a final surge or sell off. Watch the signal:

    https://uploads.disquscdn.com/images/e938a894efdfb440b4b20acbaf1fc7831f5e5a73698caca614de23c1ebfb9f65.png

  • BobbyLow

    Doing mighty fine Boss. It can be a beautiful thing when markets and systems get into sync. :)

  • Mark Shinnick

    I went long again; the sector has support within it maybe coming from a correcting $ so just going with that for the time being.

  • BobbyLow

    Yeah it could go either way especially on a real fast time frame. I use a pretty wide stop on my hourly while trying to get into a vein. I opened this short on Monday and it’s still positive. But things are always subject to change.

  • Mark Shinnick

    Looks like your position is at something of a inflection right now.

  • BobbyLow

    Yep. I’m also in a tweener position because I only use Simple BB’s and Multiples of ATR Stops for trigger points and when price gets into a range like it’s been over the past few days then ATR becomes Total Boss until it breaks out one way or another. So this could turn into a loser. I just don’t know at this point. OTOH, my long silver USLV is offsetting the decline in DUST at this moment.

  • Mark Shinnick

    Yes, I believe ATR models for ranges can be quite good.

  • stuped
  • stuped

    when i put the dots where pattern should have ended,then counting is like magic

  • http://www.captainboom.com/ captainboom

    Thanks for the clarification Boss. Busy with my real job, and will take the time to grok this later.

  • Mark Shinnick

    Are you regularly positioned in the markets using your charting method?

  • stuped

    i scalp

  • Mark Shinnick

    Some surge appears.

  • ridingwaves

    looking closer at VRX a move to 12.30’s-40’s is very possible if it breaks out of this range above 11.45, 1 hr charts
    put bid in for 11.10

  • http://evilspeculator.com Sir Mole III

    Is it working for you?

  • Mark Shinnick

    Fizzled no mojo longs today.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • http://evilspeculator.com Sir Mole III

    He just can’t help himself.

  • stuped

    i win 100 on average then lose….its been 8 weeks of intensive work and taken me 9 years working everyday at it to know it is 100% countable….you see my results…..you dont see all the lines that make this happen…..my latest run was 196 without losing a contract….right now around 80…..trying to do the es now…..im breaking the code piece by piece….it is very intensive ….but i scalp and that really does not count….so i have to improve….

  • http://evilspeculator.com Sir Mole III

    Not sure I caught it all but it seems like you’re putting in the leg work. Keep it up!!

  • Scott Phillips

    OK Gerb, you win the internet for today !

  • Mark Shinnick

    Wow…if you’ve defined something so consistently profitable seems like that counts for a lot.

  • http://evilspeculator.com Sir Mole III