Let’s take a look beneath the market to see what ‘idealized trades’ set-up within the intraday price structure of the DIA for Tuesday’s trading – then let’s view the day through the lens of a 5-minute Elliott Wave count that could have helped guide our trading day.

DIA 5-min chart:

First, the day began with an overnight gap which was quickly filled – with the exception of the bearish bar around 9:30.  That bar is an argument for wider stops in this volatile environment – and a little guts and patience.

With the gap fade complete just before 11:00am, we had four long-legged (upper shadow) bearish candles – which you could have called dojis or shooting stars – but you should have gotten the gist that those four candles (long wicks) were quite bearish, when coupled with the fact that price was testing and failing to rise above yesterday’s close.  That signaled a high probability, low-risk short-sell trade, which worked out perfectly.

Price then rallied into EMA confluence resistance two times, setting up potential fresh short-sell entries 9though again, it would have taken a slightly loose stop slightly beyond the 50 period EMA).  Keep in mind that price was supporting about the $88.00 per share level, which was broken just after the 1:00pm hour, triggering a potential support-break short sell.

Price then rallied sharply (one bar) into the falling 20 period EMA which set up yet another low-risk, high probability short-sell entry (given that the trend – and moving average orientation – was confirmed as bearish at this point).  Price did indeed make new lows on the day before forming a quick rally into the 50 period EMA resistance, forming a shooting star which was immediately – and confusingly – followed by a ‘hanging man’ candle also at EMA resistance, before plunging yet to new lows on the day into the close.

Let’s put the above into the context of Elliott Wave to see if fast Ellioticians had any clues as to what the short-term structure might be developing during the day.

DIA 5-min chart with Elliott Waves:

Hint – it’s always easier to view Elliott Waves from a closing basis rather than during the trading day, but the more you see these patterns and structure, the better you’ll be able to recognize it and count possible wave structures as they develop and form in real time, allowing you trade entries and risk management.

After Monday’s positive day, we began Tuesday in the middle of a corrective impulse down (no clue yet that it was indeed Wave 1).  There was a 5-wave sub-structure which terminated around 10:00am as price sauntered upwards to fill the morning gap, doing so in a choppy fashion.  Again, the bearish long-upper shadow candles formed, hinting that the upwards move had come to an end.

Still unsure of the count, price moved to the downside and formed support about the $88.20 level in a choppy corrective pattern before breaking down to new lows after 1:00pm.  Savvy Elliotticians could have recognized the charicteristics of a possible Wave 3 “Elliott’s Dream” wave in the making, but particularly when Wave 3 completed its impulse down into new lows at 2:30.

Suspecting a Third Wave had terminated, one could have played the corrective move as it occurred (quick reflexes were required) into EMA resistance, but the easiest play – to me at least – is always the final (terminal) Fifth Wave if you can properly count (or reasoably count) the prior four waves in real time.

In this case, the Fifth Wave formed a truncation into the close on a positive momentum divergence.

As always, viewing ‘ideal trades’ and comparing your trades/fills to the structure when it is completed by the close can help you improve pattern recognition skills and enhance your real-time trading through viewing multiple specific trade set-ups and the ideal entries/exits.

Corey Rosenbloom
Afraid to Trade.com