Intraday Action from Friday

Sep 6, 2008: 10:27 AM CST

Wow, what a day Friday gave us in the markets.  Let’s look inside the price action to see what potentially profitable trade set-ups occurred in the intraday structure of the major stock market indexes.

DIA Dow Jones 5-minute chart:

Price began the day with an opening gap down, given the bearish ‘trend day’ from Thursday, such a move was quite expected.  The intraday price reversal was not as easily anticipated, though given the ‘chop’ of the current environment (up one day, down the next, vice versa) it should not have been an unexpected development – it’s so easy to get overly bearish or bullish and miss emerging information.

Also, although this will go down as a “Gap Fill Day,” odds are quite high that if you attempted a gap-fill today and used any sort of stop-loss strategy, you were stopped out prior to the gap fill, although there was a quick move to fill the gap within the first 30 minutes of trading – unless the gap is greater than 100 Dow points, the highest probability move is to play to fill the gap.  I do recommend using a stop that’s at least half the distance to your target (meaning, if you target a 50 cent gap fill, place your stop 25 cents away from entry).

Moving on, the price trended lower into the 11:00 hour before forming quite a significant ‘triple swing’ positive momentum divergence, which at a minimum indicates the sellers are losing pressure and risks of holding short are increased – divergences often signal an exit to any (in this case) short positions you have intraday.

In fact, that worked as price surged off the new lows on the day to cross above its falling 20 period EMA (a ‘last resort’ short exit) and then found resistance above the 50 period EMA, forming a new price high and new momentum high on the day.  Price fell gently (sloping in a 45 degree angle) to its rising 20 period EMA, setting up the “Impulse Buy” trade or in this case a “Bull Flag” trade (I drew the pattern in the SPY chart below, not in the DIA chart).

Price then found resistance at the “measured move” target of the flag and also at yesterday’s closing price before consolidating, finding support again at the confluence of the 20 and 50 period EMA, and rising into the close of the day with the classic “Three Push” pattern which developed on a loss of upward momentum.  The “Three Push” pattern is a sign of weakness as price makes the final push into the close – using up buying power to form the three tight peaks.  It’s also analogous to a mini complete Elliott Wave pattern (with the three pushes being the impulse waves of a 5-wave pattern).

Though the S&P 500 (SPY) chart below has similar structure as the DIA, I wanted to provide it to show the similarities in intraday action on these indexes.

SPY S&P 500 5-minute chart:

With a hammer forming on the daily chart (by the way, if you want to look inside a hammer candlestick, Friday’s action showed the inner-workings of the pattern), it will be interesting to see the price action on Monday, which is likely to be bullish given the intervention plan of Freddie and Fannie (FRE) and (FNM) which could cause a big price move if investors are reassured.

Do some good homework over this weekend.

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