Inside Today’s DIA Trading Patterns

Nov 20, 2008: 6:47 PM CST

What a day.  Let’s take the DIA (Dow Jones ETF) trading structure on the 5-minute and 30-minute charts to see what insights we might can learn from any pattern recognition examples that might emerge on such a historic day.

DIA 5-min chart:

The first pattern that jumps off the chart at you is what I call the “Measured Move” pattern, or more technically the “A to B equals C to D” structure – keep in mind these are not Elliott or any other special kind of chart notation.

A Measured Move pattern is very similar to a ‘flag’ pattern but the measured move does not take prior trend as much into consideration.  It’s based on the principle of ‘equality’ or equal-impulse moves and this basic figure is used in many complex strategies, including some work in Gann.

That being said notice the A to B move was roughly $3.00 from bottom to peak and we had a slanted movement upwards.  Price retraced beyond the standard Fibonacci zones before finding support and swinging higher into the afternoon highs just above $82.00, which was a near exact $3.00 impulse swing off the $79.00 zone, completing a ‘measured move’ in the C to D swing.  The B to C ‘connector’ swing would be similar to the ‘flag’ portion of a bull or bear flag, though the rules are more stringent for actual flags.

Once price broke above the down-sloping trendline in the B to C swing, you could have placed a stop beneath the perceived “C” and played for an equal or measured move near $82 off the new momentum high.

Other than that, we had a gap fill that will go down as a complete “gap fill day” but closer inspection shows that virtually any sort of ‘gap fill with a stop-loss’ strategy would have been triggered, creating a ‘stop-loss’ situation taking you out of the eventual fade.

Price really didn’t ‘respect’ either the 20 or 50 period EMA all that much throughout the day as the averages converged around the $80.50 level which represented yesterday’s close.  Keep in mind that during the 10:00am EST swing, the S&P 500 broke the 2002 lows which triggered a few major headlines but resulted in a (puzzling to many) successful bounce off these levels.

Ultimately, selling pressure overcame buying pressure, confusing the confused (I guess – is that possible?) as price broke to new lows on the day.  The afternoon selling was – to many – unexpected, sudden, and unrelenting (there really wasn’t a clean pull-back retracement to enter cleanly).  It was a rough day that will go down in history as the day the S&P 500 officially broke to fresh 12-year lows, having broken beneath the 2002 intraday bear market low near 768.

DIA 30-min chart:

The 30-minute chart reveals an interesting pattern I wanted to show.  Notice that as the noon hour and intraday highs approached (on the 5-minute chart), price actually formed a strong, long-tail tombstone doji candle at the 20 period EMA resistance – a major short-sell signal.

Ever since the negative divergence that set-up at the 200 period SMA, price has been steadily down-trending, forming lower lows and lower highs while the EMA orientation has been in the most ‘bearish’ position possible.  I placed small, red arrows at each point the 50 (or 20) period EMA served as key resistance, or a good opportunity to establish a new short-sell position.  Also, the momentum oscillator registered a fresh new momentum low into the close.

Hale Stewart of the Bonddad Blog did probably the best job I’ve seen so far on explaining the significance of the day in his post simply titled “Today’s Market.”  I really couldn’t have said it better myself:  “There [is] nothing good on these charts; all the technical signals are bad.”

The “Chart Swing Trader” also posted a good summary from a broader basis than the charts in the “State of the Market – 11/20/08″ post.  He writes, “Trying to catch a bottom here is likely going to prove very difficult. [T]hese declines can last much longer and be much more severe than anyone expects. [D]ays like today are the worst. The morning bounce probably rose some hopes, but then those hopes were slowly dashed. And the type of selling that occured – the slow, deliberate selling – is very frustrating to watch….

In a conference I attended with her, Linda Raschke called conditions that occurred in today’s close as the “Slow Oozing Trend” or “Insidious Creeping Trend” – the type that dashes both sides of the market.  In the case of a down-move like today, longs are saying “Well, I’ll hold just a little longer until we get a counter-swing up and then I’ll sell” while shorts are saying “I’ll stay out just until we get a good up-swing then I’ll get short.”  The problem is, the upswing never comes and the downtrend is continued by the “slow ooze” of buyers throwing in the towel with shorts standing aside or saying “Gosh, I can’t take it any longer – I have to get short now.”  We’re conditioned to wait for retracements to enter or exit and just can’t justify pulling the trading trigger on a new low.  It beats everyone up.

Don’t beat yourself up if you lost money today.  I keep saying it but it continues to be true:  Capital Preservation is Your #1 Goal!

2 Comments

2 Responses to “Inside Today’s DIA Trading Patterns”

  1. Scott Says:

    Corey,

    Thanks for another reassuring post! I had a difficult time figuring out today’s moves. I completely missed the measured move somehow today. You continue to amaze me with you understanding of the markets and chart analysis.

  2. Bill - Speculative Measures Says:

    Good stuff Corey. I find entering a trade intraday without planning is often lousy. Whenever I get the temptation to log in and trade I pull my charts and see if my rationale is reflected there.