Fun Intraday Rounded Reversals and Smiles

Sep 8, 2008: 10:57 PM CST

With Monday’s trading activity behind us, let’s look at what happened and see if the markets were smiling at us from their charts.

First, the Dow Jones (DIA) 5-minute chart:

I embellished the chart a bit by drawing two connecting curved trendlines to look like a smiling face (we all need a little levity at times).  Nevertheless, that was the pattern of the day – that of a “Rounded Reversal” which in this case did look like a smiling price chart.

Virtually everyone expected some sort of strongly positive open or market action today due to the Freddie/Fannie announcement this weekend and the market did not disappoint.  The Dow Jones index staged a 300 point rally, virtually erasing last Thursday’s downdraft in a single day – yes, the markets are that volatile (swinging 3% days in less than a week).

Back to the intraday chart.  The first play of the day is often some sort of ‘gap fade’ play, though odds of a complete gap-fill decrease as the size of the gap increases.  In this case, we got slightly more than a 50% (actually 60%) gap fill before a positive momentum divergence formed and price eched out a ’rounded reversal’ pattern.

Rounded Reversal patterns (or saucer patterns) occur when (in this case) supply carefully and gently shifts to demand (or selling pressure gently gives way to buying pressure).  The double bottom and positive momentum divergence (not shown) gave us clues to place any stops beneath the lows of the day, with the expectation of higher prices yet to come (around 2:30 – 3:00).  Intraday lows (and highs) are often formed with momentum divergences.

The NASDAQ QQQQ ETF chart shows the momentum oscillator and an interesting full gap fade pattern (technology stocks continue to show relative weakness).

NASDAQ (QQQQ) 5-minute intraday chart:

The early morning gap was immediately filled, and then a bounce off yesterday’s close was short-lived before price reversed and made new price and momentum lows on the day.  You can see that the price low of the day was formed on a positive momentum divergence at noon complete with a hammer candlestick.

Price retraced up to the falling 50 period EMA to form a doji and then reverse back to the downside to make a higher low and sharply higher (low) momentum reading at 2:00pm.  Price then had its own virtual ’rounded reversal’ before rallying into the close, though price found resistance at yesterday’s close and the 200 period moving average.

We’re certainly experiencing exciting and fascinating times, with both the buyers and sellers getting hurt on both sides of the market it seems.  One has to continue to be patient, trade a little more conservatively, and focus a little more on the risk side of the equation until things settle down a bit.

For videos, analysis, scanning, and trading signals, check out and join the Market Club to help you navigate these trying times.

Speaking of large intraday gaps…

Rob Hanna of Quantifiable Edges posted two studies today regarding large gap days.  Unfortunately, in his first study “Quick Stats on Massive Gap Opens,” he didn’t find an edge.

Rob stated, “Since 1998 there have been 16 times when the S&P 500 has gapped up 2.0% or more. Eight of those times it closed higher than the open, and eight it closed lower.”

He shares more research on the post and declares, “So far I’ve yet to identify a sizable edge for trading a gap this large on an intraday basis.”

1 Comment

One Response to “Fun Intraday Rounded Reversals and Smiles”

  1. Michael Pitre Says:

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