All right, guys. Let's get into this. Welcome to SMT Divergence Explained.
So, for the Forex and Commodities people, unfortunately, this is not going to be as beneficial for you guys because this is specifically talking about the divergence between the S&P 500 and the NASDAQ. And we literally are forming one right now. So, again, it involves looking at two different instruments.
So, the S&P 500 and the NASDAQ at the same time. And then pretty much we're going to be comparing and contrasting their highs and lows. And that will help us dictate whether or not one the trend is going to change before even being able to see a break of structure or an inverse for value gap.
And we know that we learned about those yesterday in the day in like a couple days ago for inverse for value gap and breakup structure. So an SMT divergence is actually using both the indexes seeing a divergence between the two and then that is going to help us identify if the trend is going to change specifically when an SMT divergence is happening at a significant draw on liquidity. So with that being said, let's get into it.
To be honest, I'm not going to sit here and [ __ ] you guys. I have no [ __ ] clue what SMT divergence stands for. Smart money transfer divergence.
I don't know. I don't care. All I know is that I know what a divergence me means.
I think it just means the difference. I think okay this is horrible but whatever. Let's get into understanding it because this is actually what's beneficial.
So let's say we have a high time frame high right here and we're going to split this down the middle. This is the S&P 500 chart, ES. And then this is the NASDAQ chart.
Lit. Okay. So, we have a high time frame draw on liquidity right here.
Or let's actually move this down a little bit. Boom. And on the S&P 500 chart, we come up and we sweep out that high and then we come down and then we make a lower high.
So, what does that probably mean? it probably means, hey, orders have been filled and we're starting to change the direction to the downside. Now, if we look over onto the NASDAQ chart, we can see NASDAQ doesn't necessarily have to push above this high.
Okay, the high on the NASDAQ chart. So, again, the NASDAQ and the S&P 500 are very correlated pairs. So, they trade very similarly.
However, we are able to capitalize on these small divergences that they have because they can tell us like literally the future about what the other one is going to do sometimes. So, if I get on here and I see boom, ES came up, swept out a high time frame drawing liquidity, we make a high, come down, make a lower high. But on NASDAQ, we come up, we make a high, and then we make a higher high.
What do we see here at the same time as we are sweeping out this high time frame high? What is ES telling us about NASDAQ on this? You're probably saying, "Well, I'm not sure.
I don't really quite get it. " Well, the S&P 500 swept out a high and made made a high and then made a lower high, pretty much signaling that, yep, sell orders were able to get filled here. And we are probably going to reverse off of this significant draw in liquidity where orders had the potential to get filled.
Versus on NASDAQ, we look over here and we see, okay, a high, this high was formed at the same time that this one was, but then this one forms a higher high at the same time that this lower high was getting formed. So, what is the S&P 500 telling us about NASDAQ? >> [clears throat] >> one that NASDAQ is the more bullish pair, but also it's helping us ES is helping us be able to identify what's going to happen to NASDAQ a little bit later on because if the S&P 500 continues this trend down what is going to happen to NASDAQ, NASDAQ is going to follow suit in turn potentially giving us a higher riskreward trade on NASDAQ or just in turn helping us be able to identify the direction that NASDAQ is going to go because if we had just came up and made a higher high, we would still be under the assumption that, hey, we're still in an uptrend.
But now that we have the newfound knowledge of ES making a high, then a lower high, and NASDAQ making a high, then a higher high, instead of thinking, oh, we're in an uptrend on NASDAQ, we can look at the S&P 500, and we can say, oh [ __ ] this thing might actually go down. So, that's just like a little example of what an S& divergence is on the chart. Now, let's talk about identifying it.
So again, let's put our line down here. This is going to be the S&P 500. This is going to be NASDAQ.
So when is this going to be useful? It's specifically going to be useful when we are actively sweeping out draws and liquidity. Why?
Because this is where orders have the potential to get filled. Obviously, the S&P 500 and NASDAQ are not going to perfectly align with each other and be perfectly correlated 24/7, 365. So that's why it's very important that we have context here and understand that SMT divergences are very powerful when used when sweeping out draws and liquidity.
However, outside of sweeping out draws and liquidity, these things will show up all the time and will be pretty much like useless to us. So let's get into identifying them on the on the chart. A bearish SMT divergence is when the S&P 500 makes a high and then a lower high.
Doesn't matter which which chart this is on. So it just is when one of the indexes makes a high then a lower high and then the other index makes a high then a higher high. This is a bearish confluence for both the indexes.
So not only a bearish confluence for the S&P 500 because it's the leading index in the downward move because it's making a lower high but also it's a bearish confluence for the lagging index. Why is it lagging? because it's continuing the uptrend while ES is forming a new downtrend.
So, this one's lagging behind ES because ES was able to fill probably more orders and is able to move a little bit quicker than NASDAQ at this point in time. You know, it could be for any reason, but what is it telling us that NASDAQ is going to do? It's going to go down.
So, that's a bearish S& divergence. And again, these two charts can be changed. So the S&P 500 can be the one that's making a higher high and NASDAQ can be the one that's making a lower high.
Again, if we look at the chart and we see, oh, NASDAQ made a high then a lower high while ES made a high then a higher high. What is NASDAQ telling us about the S&P 500? It's telling us that, hey, NASDAQ is the leading index.
We probably filled orders above this drawn liquidity that we just swept out and now we're forming a downtrend and ES is the lagging index. But regardless, this is going to be a bearish confluence for both. Okay.
Now, with that being said, let's go into the bullish S& divergence example. So, again, it can be on either of the indexes on the S&P 500. All that it's going to be is when we're in a downtrend, we make a low and then boom, we make a lower low.
Awesome. Continuing that downtrend. However, on NASDAQ, we might make a low, then a higher low.
What is that telling us? Again, especially when we're taking out a significant draw in liquidity. What is NASDAQ telling us about the S&P 500?
What is it helping us do? It's saying, "Hey, we were able to fill orders underneath this significant draw in liquidity. " And NASDAQ is already starting an uptrend by making a higher low, while the S&P 500 is making a lower low.
So, regardless, what is this telling us about both of the indexes? Oops. What is that telling us about both of the indexes?
NASDAQ, it wants to move higher. It's the leading index. The S&P 500, it is going to move higher.
It's the lagging index behind NASDAQ, but NASDAQ is giving us a early jump to the game and pretty much telling us the future of what's going to happen with the S&P 500. Now, I know that might have been a little bit confusing. So, let's get on to the chart and let's show you real deal examples of this.
Let me split this thing on up and let's see why my chart looks like this. Um, blue and black maybe. Um, settings.
Okay, this needs to be completely off. Okay. Okay.
Okay. and boom, lit. Okay, so we're on the daily time frame right here.
Let's try and find an example on the daily time frame or I believe the 1 hour is going to be easier for us. You guys don't necessarily need to have the uh the charts split screen split screen like this, but it is um it's easier for me to show it like this than not. So, let's see.
Oh, this was a good example. So, this was on the higher on a higher time frame, but you can still see it. So, boom, we have a high right here.
And then boom, we have a lower high right here on the S&P 500. And then if you look at the same time, we have the same exact high that was made on NASDAQ, but a higher high that was formed on NASDAQ. So, NASDAQ, what did we do on NASDAQ?
We came up and we swept out this significant draw on liquidity. This is actually on the 4 hour. So if we want to go here, boom, and then 4 hour here.
So this is a good example right here. So we can see this high NASDAQ comes above it and makes a higher high while ES is well underneath this high and it makes a lower high. So once we form this high, what can we safely assume about both these indexes?
One, the S&P 500 is the more bearish index. But two, we know that NASDAQ was able to sweep out orders and even though it made a higher high, we know that overall the price price is going to be bearish. Why?
Because the S&P 500 made a lower high. So, what in terms of like entry, since this is on a higher time frame, I'm going to be looking at this and I'm going to be saying, okay, I'm probably going to want to take a trade on the S&P 500. Why would I want to take a trade on the S&P 500?
Because it's the leading index. It's the index that is already more bearish. Okay, so if we see a bearish S&P divergence, I'm not going to want to take a short position or a sell trade on the bullish index, which is NASDAQ, because it pushed above this high, right?
I want to take it on the S&P 500, the one that's leading the move to the downside, the one that is actually making a lower high. Okay? And then on top of that, this is really going to be used for bias, especially on the high time frames.
But I'll show you guys examples on the low time frames of when we're actually able to use it for execution. So, this is a good example of a bearish S& divergence of us sweeping out a high on NASDAQ, making a higher high, but us unable to sweep it on the S&P 500, making a lower high. And then what do we see price do on both the indexes following that?
Boom, we dump down. Boom, we dump down. Okay, let's show examples of this on a lower time frame.
Let's see if we can let's let's look at Friday's price action. See if we got anything on Friday. It looks like we did.
It looks like we did. It looks like we did. It looks like we did or not.
Just kidding. We didn't. Let's look on Thursday.
Thursday. Thursday. Thursday.
9:30. Okay. Let's look on Thursday.
9:30. Okay. Yeah.
I mean, this there wasn't like a actual like strategy entry, but this is a good example of how you could look for a entry or potentially use it as a confluence. So even though my strategy doesn't show up here, this is a good example of it showing up on the low time frames and in a bullish scenario. Now, so look right here, we're on the 5minute time frame on the S&P 500.
We have a low, then we have a higher low. If we look at the same time that this low was formed right here on the S&P 500, we have this low, and then when this higher low was formed, we look over to that same point on NASDAQ. And what does it do?
It makes a lower low. What immediately happens after we get the SMT SMT divergence? the S&P 500 ends up trading higher and NASDAQ ends up trading higher.
So, this is a good example of again all of our confluences show up on every single time frame, but this is a good example of how look right here. What are we doing while this is happening? We're actively sweeping out high time frame draws and liquidity right here.
So, again, this very well, even though this price action isn't that good to the left-h hand side, again, I'm going to want to be taking the trade on the leading index on the S&P 500. Why? Because it's the more bullish index, right?
This is a bullish SMT. I want to be taking the trade on the index that is leading the charge and not the one that's behind, right? That's still forming the downtrend.
I want to be the one that in a buy position in the one that's forming the new uptrend. Okay. So, I get on here, I see awesome like this can be a quick breakdown.
We come down, we sweep out a high time frame draw on liquidity. Awesome. We see a low and then we see another low get for formed and you're like, hey, wait a second, that's a higher low.
Let's look look over at NASDAQ. Then we see NASDAQ has the same low, but then uh-oh, there's a lower low. Awesome.
What is that telling me? That's a very bullish confluence for the S&P 500 and a bullish confluence for NASDAQ. And look, this is a prime time example.
If we look at the S&P 500 compared to NASDAQ, the S&P 500 again is the leading index. We can see a bigger and a faster expansion than on NASDAQ. NASDAQ isn't able to get up as high.
These were the highs that the S&P 500 moved past. Boom. S&P 500 was able to move past these highs.
NA NASDAQ didn't even get close to them. So again, just showing examples of why we want to take the leading index rather than the lagging index. So hopefully I mean this was really all that we needed to cover.
Um this it's kind of a blend of the confluences and I'll show you and I'll explain what I mean by that when we start getting into strategy. But um hopefully you guys understood what this is all about and you guys will learn a little bit more as we start introducing it in trade recaps um and as you guys start seeing me put it together with our strategy videos. But right now I want you guys to be able to at least identify them and then see reactions off of them specifically off of high time frame draws on liquidity because that's when it's going to be the most beneficial for us.
And yeah, with that being said, tomorrow we are going to get into time theory and then I think it's going to be time for us to be able to put all of our confluences together because we pretty much learned every single confluence that we need in order for us to be able to take trades, which is awesome. So, tomorrow we're just going to get into some advanced stuff like uh the timing of the market and when to be looking to take trades, when to be looking for manipulation in the market, but other than that, we're on a very, very good track here. So, love and appreciate you boys.
I'll see you guys tomorrow.
