Gap, Support, Bull Flag – and the Day is Half Complete

Dec 30, 2008: 12:13 PM CST

The market appears to be coming back into ‘payout’ mode, as classic patterns and set-ups are working like clockwork.  It’s noon EST and we just witnessed a successful filled gap, support bounce as expected, and a complete bull flag.  Let’s see these all.

DIA 5-min Chart:

Normally I wait until the end of the day to post intraday summaries but I couldn’t pass this up.

The morning began with a moderate upside gap which was quickly filled as price pulled back to confluence support via the rising 20 period EMA and yesterday’s close (purple line).  The pullback was also part of the “Impulse Buy” set-up which follows a new momentum high in an observed trend.  The $85.00 level also offered “round number” support so all of these ‘confluences’ made for a high-probability, low-risk trade idea.

After reaching new intraday highs, price formed numerous narrow-range (doji) candles before retracing gently back to tag the rising 20 period EMA, this time setting up the potential for a “Bull Flag,” although doing so on a negative momentum divergence.  However, the bull-flag ‘worked’ and price met its target forcefully to new intraday highs.

We could have a trend day on our hands so be aware of this possibility.

Corey Rosenbloom
Afraid to Trade.com

16 Comments

16 Responses to “Gap, Support, Bull Flag – and the Day is Half Complete”

  1. Anonymous Says:

    Corey, I am new to the 5-min chart and 20ema, 50ema, 200ema. Are these the things most traders follow? Why 5-min chart, not 1-min chart?

  2. Anonymous Says:

    Corey, another thing, what is your ndicator? ROC or RSI?

  3. toad37 Says:

    Thanks Corey, this is a very helpful post.

  4. Corey Rosenbloom Says:

    Anon,

    The best source of answers is my post How I Set-up My Charts, but in response to these questions, I’m using the 20 and 50 EMA with the 200 period SMA. The bottom panel indicator is known as a derivative of the “3/10 Oscillator” which can be programmed by using standard MACD settings and inputting 3, 10, 16 respectively.

    Through much trial and error and trading different timeframes, the 5-minute chart offers the best trade-offs for my personality and risk tolerance. I do best on this timeframe. The 1-min is too active for me and anything beyond 15 is too long – I prefer not to hold trades all day unless I have to, preferring small ‘bursts’ of trading activity, particularly in the morning. I’m not advocating everyone jump to the 5-min chart, but I find it’s best suited for my skills and experience.

  5. Anonymous Says:

    Hey Corey, Green line is 20ema on 5min chart. What are blue line and red line? thgx. Kathleen

  6. Anonymous Says:

    Got it. Thgx

  7. Anonymous Says:

    Hey Corey, Do you use stockchart.com for live charts?

  8. Corey Rosenbloom Says:

    Kathleen,

    I keep the colors consistent on all charts on all software platforms I use:

    20 EMA is green
    50 EMA is blue
    200 SMA is red

    I’d have the 50 be yellow if I could (like a traffic light) but it would never show up on charts.

  9. Corey Rosenbloom Says:

    Anon,

    I do not use StockCharts live – I use TradeStation as my vendor/broker/software but I don’t like the way those charts display on my blog. They’re not as clear example-wise as StockCharts is. Plus, SC is more the ‘standard’ that most people are used to and can use for free so it’s easier for readers to follow along and create the same charts.

  10. planetelex Says:

    Hey Corey, in regards to evaluating if this is a trend day, would you say that the trend is broken now that the DIA moved through the 20 EMA onto the 50 EMA or would you still look at going long if the 50 EMA holds? At what point in today’s setup would be a good signal to reverse and go short? Thanks

  11. Corey Rosenbloom Says:

    Planet,

    If we suspect a trend day is upon us, then every pullback would be a buy. Breaking the 20 is a warning sign but not enough evidence that the trend day has ended or was invalidated. We would need two definitive closing bars beneath the 50 EMA to invalidate a trend day.

    Generally when I suspect a trend-day, I put on a core position and then utilize a trailing stop beneath the 50 EMA and buy every pullback. I continue this until price breaks the 50. It’s a monetary edge, rather than an accuracy edge, meaning if 5 suspected trend days work as planned and 5 fail, you’ll make much more on the 5 that ‘work’ than the 5 that don’t.

    All bets are off if two bars close beneath the 50 EMA currently around $85.60.

  12. planetelex Says:

    Thanks for the response and thanks for the great site.

  13. Corey Rosenbloom Says:

    Planet,

    Today was indeed an official “Trend Day” and – although we came very close to getting the two-bar close beneath the 50EMA, we did not, and the trend day was inches from being reversed, but it was only a fake-out and price surged off the 50 to close the day on the highs in true trend day fashion. This was a wonderful example of how strong stomachs prevail.

  14. Dominick Says:

    Hello Corey. You said on a trend day you are buying every pullback, are you also shorting each pullback on the way down or are you in the trade the whole day? Also in reference to the negative divergence, would that lead you to doubt that it is a trend day and that a full reversal may be near? How would you read that. I have noticed on some trend days you can have negative divergence the whole day.

  15. Anonymous Says:

    Intraday comments are fantastic! Please continue!

  16. Corey Rosenbloom Says:

    Dominick,

    Though it may sound counterintuitive, I find it best to throw all indicators out the window completely on possible trend days. Why? The stochastic or RSI or other oscillators will stay overbought all day (flashing a constant sell signal) and even in the case of the 3/10 Oscillator, it will flash a false divergence. Remember in my book divergences are good only to forecast retracements to the 20 period EMA, though they can precede reversals. Generally, divergences are a yellow light only and need to be confirmed by price action breaking an average or support before an opposing signal is taken.

    The moment I suspect we have a trend day, I put on a small core position that I intend to hold until the close. However, I’m “scalping” any pullback, meaning – on buy days – I’m buying every single pullback to the 20 EMA and 50 EMA with a stop beneath the 50 EMA. I’ll scalp out of the trade – usually done on leverage – just above the prior swing high or if we’re forming bearish candles or hitting some sort of higher time frame resistance. I’m looking to scalp the swing (impulse) aggressively and be out soon… while holding onto a small core position.

    I make the most money in my accounts on trend days, though they may occur two or three times per month. Also, if I’m wrong about a trend day, I tend to lose a small amount on the day relative to how much I gain if it was a trend day (thanks to the core position and two or three ‘scalp’ trades).