A Trend Day Down Full of Bear Flags

Dec 18, 2008: 9:51 PM CST

Today’s intraday price action in the DIA (Dow Jones ETF) was particularly horrible for the bulls, but it provided us a few excellent examples of clear bear flag patterns as well as an opportunity to view a near perfect trend day down.  Let’s look.

DIA 5-min chart:

The day began with an opening gap… to the upside which gapped into confluence resistance via the 20 and 50 period EMAs – this gap was quickly filled.  There was no clue at this time that we would have a trend day down – usually, most trend days begin with a large-scale opening gap that is NOT filled.

Price then quickly made a new low and then coasted back up to test confluence resistance especially at the 50 period EMA where price became trapped between the two shorter-term moving averages… and then failed to reach higher, signaling a non-confirmation and offering up a potential short-sell entry.

Price then formed a roughly (though less than) 45 degree angle correction back up in the confluence resistance via yesterday’s close and the 20 period EMA… wherein price was unable to overcome this as well, setting up a possible bear flag trade for a measured move of the prior impulse – which was achieved rather quickly as price made new lows after noon.

We had yet another mini-flag into confluence resistance, this time coming in from the 20 and 200 period moving averages as price scuttled to yet another new low on the day.

I continuously find ‘confluence resistance trades,’ particularly those involving a key moving average, as an “Edge Trade” simply because we expect price to find resistance during a trend-move at key moving averages – however, the ‘edge’ component arises from the fact that the stop-loss, which is placed just beyond (in this case above) the confluence zone, is much smaller than the target, which is adjusted to your preference, but in the case of a bear flag, it becomes a measured move – almost always of which is a larger target than your stop-loss.

Moving on, price then formed a large-scale impulse move to the downside at 2:00pm, forming a new price low confirmed by a new momentum low – this set up an “Impulse Sell” trade which could have also been classified as a “Bear Flag” trade as price retraced back to the falling 20 period EMA and found major resistance there before plunging yet again to new lows on the day on a completed “Measured Move” of the prior impulse down.

Price ended the day on yet another 45 degree angle move upwards into resistance, though the clock ran out on entering any intraday trades for the session.

These trade ideas are just some of the possibilities you could have found and applied during the trading day to achieve low-risk, high-probability set-ups.  Continue to study each day’s intraday action for the “Idealized Trades” and developing price structure so that you will internalize these patterns and be able to recognize/act upon them in real time during the action of the trading day.

Corey Rosenbloom
Afraid to Trade.com

13 Comments

13 Responses to “A Trend Day Down Full of Bear Flags”

  1. Vasu Says:

    Cory !!!

    You are the best technical analyst who can lucidly explain to everyone in clear terms ,be it a novice or a veteran of the field. I am here with sending my email address.. If you need any input from us to get your blog selected as the best one… please feel free to ask me. I will be more than happy to send them a detailed appreciation note about you.

  2. toad37 Says:

    Awesome post Corey!

  3. Anonymous Says:

    Corey, brilliant analysis. Kudos on your commitment to education. Love your blog and read it daily.

  4. 2positive Says:

    angles on the chart completely depend on the scale. The 45 degree angle for you could have been 1 degree angle for me.

  5. Reggie Perrin Says:

    the clues were in previous days SP close :

    Sp closed as a daily DOJI = clear bear alert

    This is particularly true as we are edging above 50 day M Av ….which cd well prove to be a ‘false break’

    Add to mix triple witching

  6. Josh Fielden Says:

    Spot on about the patterns, and I will be more alert to them in future, but I could also add to the post by 2positive that the moving averages can’t be relied on in the early part of the chart. My charting system wont trunkate to the day before like that. So the 50 period ma doesn’t kick in until after 50 bars. I am a bit suspicious of a moving average on a 5 minute chart running over from the day before in that it could give a false reading. I don’t feel like I can trust them early on. What do you think, Corey ?

  7. Anonymous Says:

    Great post Corey… thanks.

    Seems as though the opening gap ought to screw up the moving averages. Does it?

    RP: minor point, but it’s quad witching, bud.

  8. Bill Says:

    Cory,

    I posted a Dollar Index chart which I believe will have implications for the market – particularly commodity related stocks. http://www.speculativemeasures.com

    I see you’ve mentioned Constance Brown a few times, along with your references to confluence. I read her book a few weeks ago and still haven’t made up my mind on her application of Fibonacci’s for price projections (vs merely retracements). I’d love to here more of your experiences with it.

    PS still can’t get anything but Bollinger band “Lines” to appear on stockcharts. I’ve concluded you must not be using the free charts, for I do not see where there are any settings affecting how it is displayed.

  9. Corey Rosenbloom Says:

    2positive,

    True, particularly if we’re viewing a log or arithmetic scale, among other considerations.

    In my experience, bear flags have 45 degree angular retracements on an arithmetic scale, so I see it as a confirmation for a possible bear flag trade.

  10. Corey Rosenbloom Says:

    Reggie,

    Precisely. Today’s (Friday’s) action has already been volatile, and the market is constricting/winding down into a range. A little push outside the range – particularly to the downside – could lead to a fresh impulse move.

  11. Corey Rosenbloom Says:

    Josh,

    Spot on too. StockCharts does a good job with their charts, and there are some downloads for TradeStation that try to take care of it (eliminating the gap from calculation) but generally, if there’s a gap that is larger than $0.20, it’s generally best to ignore all indicators until that gap is factored out of the price data.

    It happened to be of use in this example, but this was more the exception to the rule than the rule. Gaps skew all price-based indicators until the data falls out of the data set.

  12. Corey Rosenbloom Says:

    Anon,

    Yes, gaps skew price based indicators, but they recalibrate once the gap is factored out. It was interesting that price still respected them, despite this fact during Thursday’s trading.

  13. Corey Rosenbloom Says:

    Bill,

    Good post and explanation on the Dollar and inter-market implications.

    Connie (Brown) is quite complicated and somewhat controversial (to me at least) in her methods but they seem to work well for her and she does have some excellent, fresh ideas I think. She keeps her Gann methodology secret which she claims is her big “Money Maker” but freely shares Fibonacci techniques. I’m still trying out her methods as I understand them and am finding some things – particularly not using spike highs and lows – useful for a clearer picture. I have a lot of respect for her, but do get bogged down in details as she has a knack for explaining every little squiggle in an oscillator which can be overwhelming.

    It may be that the more advanced settings do come with SC.com membership, which is what I use. I haven’t seen the default (non-member) settings in quite some time on the site. It’s under advanced settings to the right of where you enter the indicator parameters.