Idealized Trades for Thursday in the DIA

Dec 11, 2008: 7:39 PM CST

Let’s step inside today’s trading action to see what points represented ‘idealized trades’ and gather as much information we can from the price structure that developed on this reversal day.

DIA 5-min:

The day started with an overnight gap to the downsie of roughly $1.00 (or 100 Dow Points) which is just in the gray area of “Do I fade it or not?”.  Price quickly began moving up which meant that only the nimble (aggressive) traders were able to get their ‘gap-fill’ biases moving through trades that targeted yesterday’s close (purple line).

Indeed the gap did fill and formed a new momentum high on the day, which hinted that a new price high might still be yet to come.  Price formed sort of an “ABC” correction around 11:00am.

Notice the three dojis at confluence support via the 20 and 50 EMA along with yesterday’s close – that would have been an ideal opportunity to get long, but notice what happened quickly afterwards.  Price began a move higher but was zapped down by two bars, taking us below the confluence moving averages where we generally place stops… only to have the tight stops taken out before price actually did move to new highs on the day as anticipated (or expected).

The price push to new highs at noon formed on a negative momentum divergence, combined with a doji at the top of the Bollinger Bands.  It never ceases to surprise me how many intraday highs or lows are formed in momentum divergences – today was no exception.  Take note of that.

Price then trailed down to make another attempt upwards, only to fail just short of the intraday high.  Your bearish instincts should have kicked in as price broke the $87.60 support zone, which was significant because of the EMA confluence zone.

What I label the “Best short” or best trade of the day set-up just as price broke these lows and formed three bearish doji-style candles UNDER confluence EMA resistance right where the 20 crossed under the 50 EMA.  You should have placed a stop just above the 200 moving average and tried to hold for a relatively large, trend-reversal style target which was achieved rather quickly.

The “second best” entry came after this zone when price rallied back into the falling 20 EMA, forming sort of a “bearish engulfing” candle.  Price never looked back from this level, and formed almost an hour of solid down-bars (on the 5-minute chart) – merciless.

A mini-divergence preceded the late rally into the close (marking again an intraday price low on a momentum divergence).

Take time to study the price action from your own perspective and note your perception of idealized trades, so that you can recognize and react quicker in real time.

Corey Rosenbloom
Afraid to Trade.com

8 Comments

8 Responses to “Idealized Trades for Thursday in the DIA”

  1. Vasu Says:

    Corey
    Could you please explain what a “failed 4 th ” wave means ? and what happens

  2. Sam Temple Says:

    Hi Corey,

    I enjoy your posts and have learned a lot from your analysis. Keep up the good work and thanks for sharing your ideas with us all.

    One thing to note today is that volume was unusually low for most of the day and only picked up a little bit at 3am ET. Also on a 60 minute chart, the pattern was forming what looked like a bear flag and price seemed to be resisting going lower all day.

  3. Corey Rosenbloom Says:

    Sam,

    Good call! I tend to focus mainly on the 5-min chart and how it plays within the structure of the daily chart so I miss little clues like that on other time frames, seeing them only in hindsight. I did notice the volume was a little lower than what I expected – I suppose it served as a non-confirmation of the recent higher prices, resulting in the end-of-day move down.

  4. Manuel Says:

    I am a reader of your exelent blog and I want to make you a cuestion: ¿ Do yo continue thinking the C wave of wave 4 have a target 1057-1155 with fibonacci retacements.
    TIA

  5. Dominick Says:

    I am running strategy desk. Can you please enlighten me on the location of the bear flag at the 60 min interval? Is it on a two week, one, three or six month chart? Thanks.

  6. Corey Rosenbloom Says:

    Dominick,

    I wouldn’t call it an ideal bear flag, nor would I have recognized it as such, but I think Sam is talking about the move from $89 to $87 on the DIA as the pole, then there’s sort of two flags up to the $88 level (which is confusing) then we get the ‘measured move’ down to $85.50 or so.

    It’s not something I would have recognized as a flag though because of the double-bump in the flag (retracement) portion.

  7. Corey Rosenbloom Says:

    Manuel,

    I’m going back and forth on my Elliott analysis, in terms of which Wave 4 are we in. In other words, are we completing the 4th wave of the massive 3rd wave down, which means wave 5 of 3 is yet to come soon (in which case my answer would be no to your question), or have we completed the wicked 3rd wave down officially and are starting a larger scale 4th wave up, in which case the answer would be yes (but more to the 1,080 level in S&P).

    If we crack new lows, we’ll know that the 3rd wave still has to complete, but if we start heading higher from here, it would be that we would be in the larger scale 4.

    I can see it both ways at the moment.

  8. Manuel Says:

    Thank you so much. I will follow-up on your blog.