A Rough Day for Intraday Traders

Nov 29, 2007: 8:22 PM CST

If yesterday was an ideal intraday trading environment, today was a relative nightmare. Such is the nature of the market to alternate between good periods and bad periods, trend and consolidation, favorable environments to unfavorable.

We recognize that the market adheres to the “Law of Alternation” in various aspects, and we can expect consolidation and ‘choppiness’ to take place intraday following a large ‘trend day’ the previous day.

Price must consolidate and ‘digest’ the gains made, and this usually takes place through seemingly ‘random’ and difficult to predict price movements that offer intraday traders few opportunities to capitalize on the small price swings and ‘back and forth’ or ‘back and fill’ conditions.

Today, I’ll be using the SPY (S&P 500 ETF) as the proxy for discussing the “Idealized Trades” for the day:

  1. Gap-fade. The FIRST play of the day when there is a nominal gap is to position yourself to FADE the gap with a target of yesterday’s close (dotted purple line). This trade resolved extremely quickly and extremely well.
  2. Play the Gap trade. After a gap is faded, the SECOND play is always to position yourself in the direction of the initial gap, as this is a “momentum retracement” trade. The initial gap serves as a momentum impulse and the best trade will come following (or on a retracement) of that impulse. The target would have been the price of the gap itself or just beyond, which – also – was achieved extremely quickly (probably too quickly to have profited much, though)
  3. I drew #3 only to serve as the target for the “impulse gap sell” trade, which was met and exceeded. There is not a trade at this level (exits do NOT equate to fresh entries)
  4. When price breaks above the 50 and 20 period moving average, we can assume a brief trend could be in place and we could buy pullbacks to the 20 period MA, which would have worked extremely well at both #4 pullbacks
  5. There’s my favorite pattern YET AGAIN. It’s the classic “Bear Flag” or “Lightning Bolt” pattern as I have highlighted it. While the initial impulse move down can NOT be forecast, the equal (or measured) move down CAN be forecast if price retraces shallowly into a classic bear flag pattern, as it did so nicely here. Enter short at the break of the flag and play for a “measured move” which was greatly exceeded.
  6. Momentum Divergence. Price made a swing low but the 3/10 Momentum Oscillator FAILED to make a new low (it made a higher low) which set-up a potential countertrend divergence play. The target would have been small (retracement to the 20 period moving average only) and it would have required a tight stop. The target – the 20 EMA – was achieved rather rapidly.

I define the rest of the day as “Intraday Trader Hell” due to the extreme nature of price to trade one way, reverse instantly, trade another way, reverse instantly, and chop all participants up mercilessly.

In reality, the day wasn’t that bad for 5-minute chartist and shorter time-frame traders, but the last hour’s action was one of the worst I’ve ever seen.

Use your own charts to annotate the day they way you saw it in terms of ‘idealized trades’ and be honest about stops and targets.

Comments Off on A Rough Day for Intraday Traders

Comments are closed.