Ideal Intraday Trades before the Holiday

May 23, 2008: 9:36 PM CST

Let’s jump right into the intraday action and ideal trades (looking from the benefit of hindsight) that formed throughout the day.

Let’s examine a new format, using the Dow Mini futures contract (@YMM08) viewed using what I see each day on TradeStation:


(Click for full size image)

Price was already on a move down when the cash market opened and the selling stabilized into the ‘close,’ forming a trading range type of environment.

Strangely enough, the ‘ideal trade’ set-ups, looking with hindsight, occurred as simple “Bollinger Band Fade-Trades,” meaning go long whenever the price reached the bottom of the Bollinger Band indicator and go short when price reached the upper band (recall that bands are 2 standard deviations from a 20 bar mean).

The ovals represent ideal trades within the intraday structure.

There was a positive momentum divergence which occurred through three price swings as the morning opened which led to a quick counter-trend ‘scalp’ trade long and the momentum oscillator, as well as the moving averages, became essentially useless as price formed a consolidation zone (parallel trend channels – not drawn) from 12,470 to 12,520.

Once we anticipate the type of day we expect (range-bound or trend), then we can hopefully adjust our trading tactics and indicators which make the most sense to use, as well as adjust our risk level and trading aggression (or conservatism).

Despite the consolidation zone for half the day, the market actually formed a type of “Trend Day” where the price opens at or near the highs and closes at or near the lows of the day.  The consolidation at the end of the day made for an interesting looking chart for Market Profile traders.

Pulling the camera back, we see that the Dow Jones Index is in a much more bearish orientation than it was last week.

The negative momentum divergence which had been building is now resolving to the downside, with price breaking its areas of support via the 20 and 50 period moving averages, as well as the prior support about the 12,700 area (which was prior resistance).  This area is now invalidated on the chart due to the weakness in price and the close beneath this zone.

Visually, the chart appears to have more ‘open space’ beneath price than above, meaning odds have now shifted to favor lower prices in the short-term.  We’ll continue to watch to look for signs of continuation or growing momentum to the downside and adjust risk levels accordingly.

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