Examining Tuesday’s Fluid Intraday Swings

Nov 26, 2008: 10:40 AM CST

Tuesday was an extremely fluid or rhythmically flowing day in the US Equity Indexes.  Let’s view this price action through the DIA including a gap-fade with two bear-flags (Dow Jones ETF) and see what trade set-ups and structure we observed during the trading day.

DIA 5-min Chart:

The morning began with a large-scale gap (though that definition is narrowing in this environment) which still had a bit higher to go until price met resistance into the falling 20 day EMA (not shown) which was sufficient to contain price and create a reversal.  Price then moved swiftly to fill the gap, but most traders who attempted a gap-fade early on likely experienced a stop-loss due to the early upward action.  Nevertheless, the day will be recorded as a ‘successful gap fill’.

Price moved into new lows on the day, breaking yesterday’s close slightly before finding key support at that level (after forming a new momentum low) and retracing 50.% of the prior impulse down to form a possible bear flag.  Notice the two dojis followed by a shooting star candle at the 50% Fibonacci retracement (grid not drawn) which signaled a high-probability, low-risk (high reward) short entry to target potentially a “measured move” of the prior impulse down (about $2.25 in the DIA).

In a demonstration of the ‘fractal’ nature of the market, look closely at the “measured move” portion of the larger bear flag from 10:00am to 1:00pm.  The final impulse into 1:00pm also had a miniature bear flag as well, which set up into confluence EMA resistance before hitting its target as well, which was also the target of the larger impulse.  Study this closer – very interesting.

By this point, we were observing a positive momentum divergence which hinted that selling pressure was likely decreasing and indeed at the price projection target from the bear flag (achieved), a nice counter-rally materialized into confluence EMA resistance.  Price then swung cleanly back down actually making a new low on the day on two very important structural notes:

First, price completed a triple-swing momentum divergence, which almost is like igniting a fire or perhaps compressing a string to its breaking point.

Second, on the new lows on the day, price formed a strong reversal candle – a powerful hammer – which, when combined with the triple-swing divergence, hinted quite strongly that odds were greater for an upside move than a downside one, leading you to place a stop beneath the $82.75 lows and perhaps play for a large price move up.

We got the price move up quickly, and as price paused to retrace – allowing a second-entry – price found its way to major confluence support via the 20 and 50 EMA as well as support from yesterday’s close.  That was also a high-probability, low-risk trade set-up (idea).  Ultimately, price did not close on the highs of the day, but day traders many times exit positions at the close.

With that being said, let’s overlay a potential Elliott Wave impulse count over price to see if that would have added additional probability or structure to the trading day.

DIA 5-min Possible Elliott Wave Moves:

We could even call this a sort of ending diagonal or compression wave, since Wave 1 was the largest with Wave 3 being shorter than W1 and Wave 5 (which was almost a truncation) being shorter than Wave 3.  Each wave subdivided into smaller fractal waves.

I’ve found that trying to keep Elliott counts during the day to be helpful, though it requires a good understanding of Elliott and quick reflexes and the ability to adjust counts if need be.  It also helps to view Elliott analysis as analyzing probabilities of what might NOT happen as opposed to what WILL happen.

To me, it adds an extra layer of probability, meaning if I observe a momentum divergence into support, that’s usually enough to trigger a trade entry, but it can be helpful to observe if that set-up might be part of an Elliott structure which can add just a little ‘something extra’ to the confidence level.

That being said, yesterday’s price action was a good example of many concepts, and it would be wise to take your own chart and annotate the day’s action in terms of where you deemed the ‘ideal trade set-ups’ or price structure to be.

The more practice you get, odds are the better you’ll be at seeing these patterns in real time, and more importantly, acting upon them.

2 Comments

2 Responses to “Examining Tuesday’s Fluid Intraday Swings”

  1. J Says:

    Hi, Corey:
    Happy Thanksgiving! Thank you for all your posts. It has been a wonderful experience reading and learning from your sites.

    What do you do when the signals (doji, hammer, momentum divergence etc.) at one time-frame (e.g. 5 min) are not quite confirmed in another time-frame (e.g. 15 min or 30 min)?

    Thanks a lot,

    J

  2. Corey Rosenbloom Says:

    J,

    Thank you for reading and for the comment.

    I tend to set the picture up via the daily chart and develop expectations and note key possible inflection points (or targets) and then try focus on the 5-minute chart for actual trading and management – I’m most comfortable doing that.

    Although I do always have the 15 and 30 minute chart (now 1min in this environment) on the screen, I’m less interested in taking trading signals from them or trying to even guess signals. I’m more interested in seeing if there’s key resistance or some other inflection point that would halt a directional trade bias on the 5-min chart.

    If there’s conflict – often there is – I’ll either trade smaller or perhaps wait until the inflection point on the higher timeframe is negated before taking entry.

    I used to be so caught up in reading charts on all timeframes that there just weren’t any signals because I kept seeing so many conflicts. Ultimately, it might just be best to pick the frame that makes you the most comfortable and focus the bulk of your analysis/trading decisions on that frame and then use other frames as sort of ‘confirmation/non-confirmation’ rather than trying to analyze them deeply as well.