From the March 01, 2010 issue of Futures Magazine • Subscribe!

E-mini day-trading and intermarket divergence

The day-trader does not necessarily need to wait until the afternoon of a trading session to compare price levels if he’s looking for intermarket divergences. Striking divergences can occur between the four related stock index futures markets early in the day. Early session, intermarket divergences can make for profitable trading setups.

In “Durable reaction” (page 48), taken from March 25, 2009, the market rallied from the open following a better than expected durable goods economic report released 30 minutes prior to the open. The cumulative ticks reading was bullish throughout the first 45 minutes of the trading day, with the one-minute NYSE ticks histogram bars positive and green.

The TF market was trending continuously higher, but curiously, the NQs, which had recently been a strong leader market, were lagging. In the Four-Plex view, the NQ contract is almost flat, while the other markets show definite upward movement.

If the TF market also had lagged, the interpretation might have been that the ES and YM were overbought. But here, given the bullish Cumulative Ticks reading, the interpretation is the NQ market is trailing. Once again, a consolidation buying ledge formed by the NQs made for a low-risk entry.

The examples to this point have been long entries. The Inter-Market Divergence technique works equally well to the short side.

Pivot Profit Chart

In “Pivot profit”, from Oct. 30, 2009, we once again see an out-of-kilter market. TF, ES and YM contracts are near or below their pivot price level and far below the previous session highs, while the NQ contract is well above its pivot and making a second attempt back to its previous session’s high.

The trader interested in taking advantage of this intermarket divergence will closely watch NQ price action as it attempts a second climb to the previous day’s high. When a second attempt at breaching that price level fails, forming a double-top, a valid short setup is in place. Contrast the almost steady trend down in the TF contract next to the NQs, with the TF at its previous-session low and the NQ at its previous-session high. Again, the fact that the other markets, ES and YM were also down argued for a short in the NQs.

On this day, the Nasdaq 100 high-tech stocks were not going to take the market higher. They could hold out for a while but ultimately were overwhelmed by the selling exhibited in their sibling mini markets.

A note of caution is important here. While intermarket divergence trade setups are powerful intraday trades, they should not be relied on exclusively or over used. For example, excitedly chasing one market because of a sudden up or down thrust in a single bar of another market can make for a losing trade. While it is the case that one market can tip its hand before the others, giving you a head start in a rally or sell-off, the higher probability setup consists of an intermarket divergence that has developed over a longer period of the trading day.

An intermarket divergence trade should be consistent with the trader’s other analysis. Don’t fade a trending market simply because one of the leaders is far above the others. A more likely scenario is that the laggard market will catch up to the trend being played out by a leader. As always, be aware of the time of day. For example, divergences that occur in the last hour of trading, and near the close of the stock market session, are often too unpredictable to trade.

These caveats aside, intermarket divergence makes for a powerful addition to the E-mini stock index futures day-trading toolbox.

For 20 years Michael Gutmann was a software engineer and manager at Intel Corp. He trades his system daily and is the author of “The Very Latest E-Mini Trading: Using Market Anticipation to Trade Electronic Futures.” E-mail him at

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