Idealized Trades for Friday March 14

Mar 15, 2008: 10:26 AM CST

While Friday’s action was quite volatile, there were actually some very profitable and simple trades you could have taken within the price structure on the day.

Let’s look at the DIA (Dow Jones ETF):

The day did not begin with a significant gap, yet within the first 30 minutes, price had fallen from $122 to beneath $119, which was a 300 point Dow drop. It was difficult to get any entries into this large volatility momentum move down, which occurred due to fears that the recent economic (financial) injection (stimulus plan) might not work after all to save the banks from financial crisis. Shortly afterwards, the Fed announced a major bailout of Bear Stearns (BSC), which was the major new event of the day.

Price recovered, and found significant resistance at the falling 20 period MA, which set up a short-sell trade if you were aggressive (trade highlighted in purple). Price inflected off the daily S1 pivot (not shown) and then pulled back to the falling 20 period MA again, setting up an identical trade which terminated also at the daily S1.

Savvy traders may have noticed a triangle consolidation forming, which prompted them to stay out of the market until a break of consolidation occurred. Even though the day had so much negativity and downside momentum, it’s still best to wait until price breaks because you cannot predict the actual price ejection direction from consolidation triangles (though triangles tend to be continuation patterns).

The break on higher (relative) volume signaled a trade to the downside, which targeted the distance of the height of the triangle, which witnessed a disheartening ‘throwback’ (notice the doji candle just before 1:00) which took out conservative traders with tight stops in this short-sell trade.

The initial break paused and formed a 45 degree angle pull-back into key resistance again by the 20 period moving average, which set up a high-probability short-sell trade again which was a classic bear flag (which achieved its target perfectly, which happened to be the intraday low).

A lengthy momentum divergence had been setting up all day as price continued to make lower lows, signaling that a turnaround was increasingly likely. Indeed, this occurred, as the day closed with moderate strength, rather than closing on its lows.

An “impulse buy” trade set-up with momentum making a new high and the pullback into moving average support allowed for a buy-side (long) trade with a small target (which gave you 50 Dow points into the close if you are a pure day-trader).

While there were many more trades to be located, I always recommend you keep a file or journal of what you perceive to be the ‘ideal’ trades of the day, and then look at your results to see how much of those ideal trades you captured, or what percentage of the available profits (or losses) you achieved from these trades.

2 Comments

2 Responses to “Idealized Trades for Friday March 14”

  1. tomo Says:

    Hi again.

    I have question about how you draw your triangle or bear flag. Do you have any objective method of drawwing them? It seems that you draw them differently every time, once using only bodys of candles, once using lows etc. What is your method? I ask because there is at least one other way of drawing the triangle on this chart.

  2. Corey Rosenbloom Says:

    Tomo,

    It seems every technician draws trendlines differently, which results in the individual differences you see on different analysts’ charts.

    For me, I try to use closing prices to draw the lines, and looking back, I should have raised the bottom trendline (in the above chart) to reflect that, but I did not intentionally capture the intrabar lows, it was just a slight error on where I placed the annotation. It actually would have made more sense to raise this line slightly.

    I prefer using closing prices on the daily chart (and weekly) because that reflects the committment price of traders willing to hold overnight, and is often more powerful than intraday readings, unless they are extreme (long shadows). It’s a little more subjective and ‘ok’ to use shadows on the intraday charts because there’s less significance one the candle’s close. The psychology is similar, but far more powerful on the daily charts where the end of day forces a decision. It’s extremely unrealistic to attach the same significance at the close of each 5-minute period than it is the day’s close. As such, one’s decision on how and where to place trendlines matters.

    Good comment and it keeps me on my toes!