Pivots, Patterns, and Intraday Swing Trades: Derivatives Analysis with the E-mini and Russell Futures Contracts, + Website

CHAPTER 5

Leadership Divergence

One of the most useful tools for trade setups in the 1st Frame of the day is an understanding of leadership and its corollary, divergence. Most traders only focus on the index instrument they trade, and at that, most index traders only trade the E-mini S&P (symbol ES). To borrow again from my mentor Randolph Newman, who is quoted at the start of Part One, “Everybody is always wrong.” The market by its most fundamental nature is a contrary animal. Advisory services abound that use contrary opinion to call the tops and bottoms of markets. But it goes further: Common axioms for trading mislead traders into dos and don'ts, and cans and can'ts to the point where the most basic of assumptions with which traders now approach the market must be questioned. “Never sell a new high or buy a new low” is one of those axioms that deserve an immediate examination by new traders. And advice about what to trade among the main index futures contracts is also worth examining closely.

And just so as to push traders a bit into expanding their watch list to include several index contracts simultaneously, let's examine the assumptions that put the ES contract to the common forefront. “The E-mini S&P 500 contract leads the market.” Utter nonsense. And yet I've heard so-called head traders and self-inflated analysts in vendor-based chat rooms make this claim as a given. Seldom does the ES contract lead the Dow Jones 30 (contract symbol YM); almost never does it lead the ...