Monday offered us a variety of interesting trading opportunities, many of us were instructional moments.  Let’s step inside the 5-minute chart of the SPY – the S&P 500 ETF – spot some of these opportunities and locate some of the ‘idealized trade’ locations.

SPY 5-min:

To those of you who are regular readers, you know I prefer examining the DIA (Dow Jones ETF) which is my natural preference.  Today, it seemed like the price action was a little clearer to show as examples in the SPY rather than the DIA for once, so that’s why there’s a slight change in the analysis vehicle.

The DIA actually experienced an upside gap-fill this morning which resolved quickly.

Moving back to the SPY, price fell straight out of the opening bell into new lows and a high-probability short early in the day.  The 20 period EMA crossed beneath the flattening 50 EMA and price rallied quickly to this level, setting up a high-probability, low-risk confluence resistance short-sell trade (I need to come up for a name for this trade set-up – if anyone has any suggestions).

Ultimately the short didn’t give much profit, as price quickly began a 45 degree angle retracement upwards, which I recognized and commented as a potential bear flag once the price broke back down beneath the key averages.  Ultimately, price did make new lows on the day, but it formed more of a ‘measured move’ structure rather than a pure bear flag.

It fell just shy of its target before price rallied into an even steeper retracement back into confluence resistance before rolling back over, completing another bear flag/measured move trade that exceeded its target and yet again made new lows on the day just after 3:00pm.

The surprising ‘late day surge’ came off a triple swing positive (or flat-line) momentum divergence which preceded the quick end-of-day rally.  A reader asked me to comment on possible causes and I suspect it was due to market acceptance either of the upcoming Federal Reserve Rate Cut or renewed hope in the “Big 3 Automotive” bail-out resolution – or perhaps it was simply an oversold market where funds (or traders) did not want to hold short ahead of a Fed decision meeting.

One thing I did want to highlight was the “Three Push” Pattern that formed for the whole day on the 5-minute chart (which, of course, was only evident after the third push resolved after 3:00pm EST).  The “3 Push” Pattern is akin to Elliott Wave (though it does not strictly follow Elliott tenents) where price makes three successive new lows (or highs) on a growing positive (or negative) momentum divergence.  It is also valid if the momentum oscillator forms a ‘flatline’ divergence, as was the case today (though it appears each down-swing was on a slightly higher oscillator value).

The “Three Push” pattern signals price exhaustion and often precedes a major (on the respective timeframe) reversal, similarly to what a 5th Wave in Elliott Wave means.

Continue to learn from Monday’s action as it yielded good educational opportunities for you to study in order to internalize these patterns and be able to recognize then act on them in real time.

Corey Rosenbloom
Afraid to Trade.com