Fascinating Intraday Action

Jan 31, 2008: 10:21 AM CST

I thought I’d show yesterday’s intraday price action as an educational reminder than anything can happen in the market, but signals usually precede calamaties.

From the perspective of the DIA, Dow Jones ETF on the 5-minute chart:

First, note the Momentum Divergence (1). Price makes a significant new high, while the momentum oscillator fails to confirm the new high.

Second, note the Shooting Star Candlestick (2) (which could almost be interpreted as an Evening Star as well). This is a classic one-bar reversal candle that isn’t predictive alone, but when combined with a momentum divergence, it adds to the bearish case.

Finally, note the significant Volume Divergence (3), as volume rockets to new daily highs on the first swing, but also fails to confirm (like momentum) on the second swing.

Typically, you get a three-pulse continuation move from a Fed announcement, followed by a strong close, but yesterday price gave us only two pulses and then told us it would be best to exit. The price rolled over and then plummeted into the close, in an intraday swing of $3.00, or 300 Dow points in less than an hour.

Regardless of the reason (bond downgrade, Yen carry trade unwind), price can do anything, but the charts often signal hints and clues to those who are open to perceive them. There was no way to know how far the market would sell-off, but there were hints that things weren’t behaving normally prior to the shock decline.

While certainly not entertaining for those who lost money on a near ‘sure bet’ yesterday, this was fascinating from an educational perspective.

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