Friday’s Intraday Index Trading Tactics

Jun 27, 2008: 8:51 PM CST

Friday’s action almost turned out to be another trend day down, but a recovery into the close prevented this development.  Let’s look at some of the idealized trades we could have taken during the day, to learn more about these patterns should they develop soon in the future.

The DIA – 5-minute:

The day began with a 10-minute move down, which was corrected into a very high-probability, low risk trade as price retraced both to the falling 5-minute EMA and yesterday’s close (which often can serve as support/resistance).  A doji candle also confirmed the high probability trade (short).

A second trade, and second doji formed around 10:30 with the same logic.  The target is just beneath the most recent swing low with a stop conservatively above the 20 period EMA or aggressively above the falling 50 period EMA.

The third ideal trade could be described as a ‘bear flag’ trade, which I draw on the SPY chart below.  Price breached the falling 20 period EMA, but failed to test the falling 50, giving a little ‘heat’ to the trade, but ultimately price broke down sharply to make new lows on the day.

At this time, a three-swing positive momentum divergence formed, which clued you in that the odds of lower prices had been reduced, and momentum may be ending to the downside.  In fact, we got a reversal off the lows to form a new momentum high, and price languished beneath the falling 50 period EMA into the weekly close.  Also, the breach of the 50 would have signaled the exit for any core position you put on in anticipation of today’s action being a trend day.

The SPY chart is very similar, only I highlighted the “Bear Flag” or “measured move” portion.

The SPY actually threatened the falling 50 period EMA more than once, but never violated it until after 2:00 following the momentum divergence which formed the new momentum high.  Price ultimately found resistance into the close from yesterday’s closing price.

Annotate your own charts of the stocks and markets you trade for the “idealized trades” based on your understanding of price action, so that you can recognize key patterns or set-ups in real time and have more confidence in trading them.

2 Comments

2 Responses to “Friday’s Intraday Index Trading Tactics”

  1. learner Says:

    excellent description! thanks for taking all the effort to update the blog with such ideas and guidance.

  2. saurabh Says:

    hi friend, nice to learn from u ..sometimes the pattern by pass and we discover them later on