Fascinating Intraday Action

Jun 2, 2008: 8:36 PM CST

Today’s intraday price action gave us a major lesson in price patterns, volatility, and clean high probability trade set-ups.  Let’s see what we could have learned today in the SPY.

First, the day began with an overnight gap, which led to a stop-loss if you tried to trade back into the gap.  Often, when a gap-fade trade fails, this sets up considerably higher odds that the day’s action will then unfold into a Trend Day style environment, which calls for aggressive tactics.

Indeed, the day resembled a trend day move which exhausted itself to the downside in a clean ‘measured move’ formation and triple momentum divergence.

With the market plunging lower and stabilizing into the noon hour, you should have been looking to play short, which set itself up with the price pullback (consolidation) to the falling 20 period moving average which set up the “Impulse Sell” trade that came after a new momentum low.

In this case, the trade gave significant profits quickly as the 5-minute period volume high was actually made around 12:30 in an interesting, climactic sell pattern.

Despite lower prices, the momentum oscillator formed a higher low, creating a divergence that clued us that the price action had lower probability of heading lower.  In fact, the divergence set up a quick countertrend “scalp” back (long) to the 20 period moving average.

Price then completed its intraday reversal to the upside by breaking above the 20 and 50 period moving averages, preventing the day from closing at the lows of the session.

Also, one could have noted a type of bear flag (more like a pennant) that occurred prior to the mid-day sell-off.

Always annotate charts of interesting patterns or interesting days so that you can internalize the patterns better to make quicker, more accurate trading decisions.

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