Ideal Trades and Lessons from Wednesday’s Session

Wednesday offered some interesting trade set-ups and opportunities that I wanted to describe from an educational standpoint, as the day showed a clear example of a bull flag measured move and momentum divergence… I also discuss Fibonacci retracements for added depth of understanding.

With that said, let’s look at the DIA (Dow Jones ETF) 5 minute intraday chart:

The day started with a relatively normal opening session, which then gave way to a large momentum move up that created a new momentum high and new price high – meaning we were looking to buy the first pullback against that momentum move (it’s often very difficult to anticipate initial moves but often far easier to play the ‘ripples’ or subsequent expected moves that come from price/momentum impulses).

So as price retraced into noon in a steady pattern, pulling back to the key rising 20 period EMA, the “Impulse Buy” or retracement trade set-up, which could also be considered a potential bull flag (not drawn) or “Measured Move” pattern, where we enter at the break of the retracement (or test of the moving average support) and then play for an equal (measured) move of the initial impulse (placing a stop beneath the 50 period EMA).  This play worked out perfectly.

As price made a new high, the momentum oscillator failed to confirm, and actually made a lower high, which set-up a ‘divergence’ trade which preceded the day’s trend reversal and actually marked the high on the day – it surprises me how many intraday price highs (or lows) are formed with a clear momentum divergence (lack of sustained ‘power’ or conviction).

So the divergence trade allowed us to enter counter-trend short to play for a small target but anticipate a possible reversal and to expect potentially that moving averages might fail to provide support.

As we see, initially the 20 period EMA did act as support but failed, while price supported at the next zone – the 50 period EMA, only to bounce weakly and then fail there too with a new momentum low on the day.

Let me step back a moment and discuss Fibonacci Retracements 101 – both of today’s momentum moves retraced back to the key 38.2% retracement level before supporting and traveling higher.  The second move actually pulled back deeper to the 50% retracement before rolling over.

Focus on the green highlighed area on the chart to see the retracement support.

DIA Fibonacci Retracement Focus:

Fibonacci retracement grids are drawn from a swing low to a swing high, and are best done on impulse or continuous moves (such as was the case for two examples yesterday).

The Blue grid retraces the $113.90 to $114.90 price impulse while the red grid retraces the $114.50 to $115.60 price impulse.

When you see multiple forces of possible support (called ‘confluences’), then often these set-up powerful, low-risk trades.  Combined with moving average and trendline support, Fibonacci retracement levels (38.2%, 50.0%, and 61.8%) can also clue you in to possible price inflection (reversal) points to establish a low-risk (tight stop) entry.

Wednesday’s action provided classic patterns and set-ups that often repeat themselves, providing potential edge for those who understand these principles, and integrate them into personal experience and a trading strategy.  I always recommend annotating charts to clarify patterns and reinforce them through visual repetition.