Figure 1: 377 Tick Chart of the E-Mini S&P for 10/12/04 - 10/13/04
Some of the most powerful tools featured in the Jan Arps’ Traders’ Toolbox library are the Radar 1 Fear-Greed Oscillator, the Radar 2 Price Leader Acceleration Oscillator and the Arps Trender Pullback tool. In the previous chart, we can see several examples of how these tools work together to signal profitable entries and exits.
The Fear-Greed Oscillator is shown on the bottom of the chart as a histogram in green and red. It measures the interrelationship between volume and price on every bar to determine whether market “friction” is less to the upside or the downside. When the bars are green, it indicates less friction to the upside signifying that the bulls are in control. A downward bias, signifying that the bears are in control, is represented by the downward-pointing bars in red.
The Radar 2 Price Leader Acceleration Oscillator is represented by the red and green lines moving through the chart. The crossing of these two lines indicates a potential market entry point.
The Trender Pullback indicator is represented by the red and blue dots on the chart. It provides trend continuation signals and represents excellent potential entry points at pullbacks in the trend.
When you use the Fear-Greed Oscillator in relationship to price, several notable divergence patterns occur. The first is labeled A. Price made a low at 9:06 that is matched by a corresponding low in the Fear-Greed Oscillator. Near 11:27, price makes a higher low while a lower low is seen in the Fear-Greed Oscillator. The lower low in the Fear-Greed Oscillator shows the higher accumulation of selling pressure, but the higher low in price confirms the weakness of this downward move in the oscillator by its inability to drive prices to new lows.
The occurrence of higher lows in price in the face of lower lows in a corresponding oscillator is referred to as “Trend” or “Type 2” divergence. This type of divergence suggests that selling pressure is weak and that the trader should be looking to enter the market long. Trend divergence tends to confirm the existing trend and provides reassurance that a long position in this example shows more profit potential than a short position. The Radar 2 Price Leader is showing increasing strength at point A, and entering a Buy order here would put the trader long from around the 1118 mark.
At point B, we see the more common form of divergence, “Pivot” or “Type I” divergence, which is typical of market exhaustion. Price is driven higher by late buyers trying not to miss the move. They drive price up by entering market orders but lack the power to drive the market up to higher levels in the face of earlier buyers beginning to take profits at this level.
This slackening of buying power is reflected by the declining peaks on the Fear-Greed Oscillator in spite of higher peaks in price. The topping process at point B is further confirmed by divergent action in the Radar 2 Price Leader, and the smart trader would be exiting his or her long position and going short at the 1124 - 1125 level.
Price action around point C highlights the strength of the Fear-Greed Oscillator as a trend indicator. Overnight trading has rallied price to a new high, but, shortly after the opening, the small peak in the Fear-Greed indicator shows that the gap high occurred on weak volume support, and price immediately begins to decline.
A small rally at point C is not confirmed by the Fear-Greed Oscillator; it is unable to roll over to green. In addition, the Trender Pullback tool generates a sell signal at Point C, in the form of a red dot. The Radar 2 Price Leader makes a downward crossover at this point and, when price goes below the low of the setup bar, a sell entry is confirmed at around 1125.50.
As the market proceeds downward, the Fear-Greed oscillator continues to affirm the strength of this move. As is normally seen in a trending situation, the Fear-Greed reaches its maximum excursion approximately 1/2 to 2/3 of the total extent of the trend. This is the point at which buying pressure begins to overcome selling pressure as the early shorts begin to cover and contrarians begin entering buy entry orders.
In the area of point D, we begin to see divergence between the Fear-Greed and price that would suggest a possible end to the downtrend. Exiting the down move around 1117.25 on divergence at D would have resulted in an 8.25-point gain.
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