Interesting Intraday Action Today

Dec 1, 2008: 11:04 PM CST

There’s so much to write tonight, but let’s focus first on the wild and unexpected events that occurred during the trading day which will be classified as a failed gap fade, failed “rounded reversal,” and – depending on your stop-loss placement – successful trend day down.

DIA 5-minute chart:

Let’s start by discussing the overnight (weekend) gap.  Price gapped 2% down from the start – not a great way to start a the Monday after a good rally in the market last week.  Generally, gaps greater than 100 Dow points have a tendency not to fill, and there’s an inverse relationship between the size of the gap and the probability of a successful gap fill (the larger the gap, the lower the odds of a complete fill).

In this case, the buyers didn’t even try to fill it, as the market plunged over 100 as trading opened.  That was your first clue – as if you needed it afterwards – that odds were quite high that the day could unfold as a ‘Trend Day.”

This meant you should establish a core position and hold until the close, taking every opportunity to short any rally whatsoever to the falling 20 EMA.  A stop would be placed slightly above the falling 50 period EMA.

The thing about trend days is that they can have a tendency to be ‘over-ruled’ by a “Rounded Reversal” structure like we had today.  A “Rounded Reversal” develops off a lengthy, multi-swing positive momentum divergence such as we had today as price forms a lengthy bottom and then curves back up slowly, breaking the 20 and 50 period EMAs and making a near identical price move as the down-move that preceded the reversal.

The lines were clearly drawn and the guns were aimed and ready – would it be a trend day or a rounded reversal day?

Depending on your stop-loss placement, you could have gotten smacked on both sides.  If you’re like me and place stops (erroneously) too close to the levels you should (such as above the 50 EMA) then your trend-day positions (and opinion) was stopped out at the red arrow and perhaps you went long, assuming the day was perhaps now a Rounded Reversal.  Fair call.

But if you chose to apply your stops more liberally (which testing – and today’s example – shows often works better than tight stops), and had the patience to feel the heat of a potential price rally, then to the victor go the spoils of the day – or at least, to those with strong trading stomachs.

Price ultimately did breach the 50 EMA gently before rolling over into a sudden and violent trend move lower, mercilessly burying those who positioned long into a possible reversal (and endlessly frustrating the shorts who took too tight stops).

Of course, if you are stopped out, it doesn’t mean you can’t shift positions if need be (or if another criterion is met) and join the other side of the market, which takes strong discipline in admitting analysis error and quick wits to reverse positions, but to the nimble go the spoils.

Ultimately, price closed on the lows of the day, shaving 9% off the NASDAQ Index and over 7% off the Dow Jones and S&P 500.  It was particularly devastating for swing traders who went long into the latter part of last week’s rally.

Today’s trading offers various lessons for participants.  Print off your own chart and analyze the price action according to your methodology and don’t be upset if your trading performance today wasn’t as brilliant as you expected.


3 Responses to “Interesting Intraday Action Today”

  1. David Says:

    I should have added i was with you on the rounded reversal though. I opened a small long in CL only to bail fairly quickish ( thankfully )for a small loss.

  2. saurabh Says:

    another learning day for me


  3. Anonymous Says:

    awesome post, love your site!