The past two days bestowed us with two consecutive textbook examples of Zero Lite divergences. This was a great opportunity for a tutorial highlighting these types of patterns as a template of how savvy traders can get positioned ahead of intra-day ES price swings:

A key phenomenon to look out for on the Zero Light Indicator (ZLI)
are divergences between the signal line and ES price movements. Since
the introduction of the ZLI such occurrences have often proven to be
great setups to take advantage of impending intra-day price swings. The
best way to explain ZLI divergences is to look at an example:

Shown on this chart are two textbook occurances of signal/price
divergences on the ZLI. The first one framed in orange represents a
bearish divergence. We call it a divergence because the
strength of the positive signal appears to be diminishing while the ES
futures happily continue to climb higher. If we draw a line from the
respective peaks on the ZLI on the bottom and the ES price chart on the
top we find that the peaks on the ZLI are trending down – at the same time the ES price peaks are trending up.

In technical analysis this is called a price/signal divergence
and as you can see on the chart, taking a contrarian position (i.e.
going short the ES futures) proved to be quite profitable. The inverse
example of a textbook bullish divergence occurred the very next day.
Again we see a divergence between the ZLI and the ES futures – just
that in this case price is trending downward while the ZLI’s signal line is trending upward.

Bear in mind that taking a contrarian position when divergences occur is not a guarantee
for success. However in the twelve months since the introduction of the
ZLI these type of divergences appear to resolve as expected a majority
of the time.

Cheers!

Mole