Trade Smarter: Identify SMT Divergence, automatically.

Screenshot of OR88 indicator
 

SMT Divergence: A Trader’s Secret Weapon

SMT (S&P 500 Micro E-mini and Nasdaq-100 Micro E-mini) divergence occurs when the price movement of the /NQ (Nasdaq-100 Micro E-mini) and /ES (S&P 500 Micro E-mini) futures contracts move in opposite directions or show significantly different momentum. This divergence is particularly noteworthy because these two index futures typically maintain a strong correlation. For example, when the /NQ continues making higher highs while the /ES struggles to break resistance levels, this divergence can signal an impending market shift.

Traders can leverage SMT divergence as a powerful predictive tool. First, it can serve as an early warning system for potential market reversals – when technology-heavy /NQ outperforms the broader /ES, it might indicate unsustainable market conditions. Second, divergence creates arbitrage opportunities where traders can simultaneously go long on the stronger index and short the weaker one. Finally, SMT divergence often precedes sector rotation, allowing savvy traders to reposition their portfolios ahead of major market shifts. By monitoring these intermarket relationships, traders gain valuable insights that aren’t obvious from analyzing either index in isolation.

Common Correlated Pairs in Financial Markets

Here are some notable correlated pairs that traders frequently monitor:

  1. Index Futures Pairs
    • E-mini S&P 500 (/ES) and E-mini Nasdaq-100 (/NQ)
    • E-mini S&P 500 (/ES) and E-mini Dow (/YM)
    • E-mini Russell 2000 (/RTY) and E-mini S&P 500 (/ES)
  2. Currency Pairs
    • EUR/USD and GBP/USD (positive correlation)
    • USD/JPY and USD/CHF (positive correlation)
    • AUD/USD and NZD/USD (positive correlation)
    • EUR/USD and USD/CHF (negative correlation)
  3. Commodity-Currency Pairs
    • AUD/USD and gold prices (positive correlation)
    • USD/CAD and crude oil prices (negative correlation)
    • NZD/USD and dairy prices (positive correlation)
  4. Commodity Pairs
    • Gold and silver futures
    • WTI crude oil and Brent crude oil
    • Natural gas and heating oil (seasonal correlation)

Screenshot of OR88 indicator
 

Screenshot of OR88 indicator
 

Screenshot of OR88 indicator
 

While SMT Divergence can be a powerful tool, it is important to remember that no trading strategy is perfect, and risk management is essential.