Intraday Elliott Wave and Flag Lesson in SPY June 16

What a day!  Let’s learn a few critical lessons from today’s trading activity, particularly in regards to how Momentum fits into Elliott Wave, how bear flags are confirmed with dojis, and more!

SPY 5-min:

Let’s take it step by step.  We had a negative momentum divergence (not shown) on a retest of the intraday highs of $93.30 at 11:00am.  Many times, intraday highs are formed on momentum divergences as both the high and low show as an example today.

Once price broke down into noon, we formed a new momentum and new price low at $92.60 – this hinted that lower prices were yet to come.

We had a shallow pullback that formed a messy bear flag, but the goal is to short the first pullback after a new price and momentum low which fell shy of testing the 20 EMA (which would have been an ideal entry).

As price broke back beneath $92.60, this was your entry short around 12:30 which would have positioned you in front of the ‘waterfall’ move down into the 1:00pm lows.

If you look to the one-minute chart, or can envision it here on the 5-minute chart, we formed a Three Push pattern (complete with momentum divergence)  into the 1:30pm lows which preceded a nice retracement move up that ended just shy of the 20 EMA on a simple doji for beginners or an evening doji star candle for more advanced traders.

I deem this (the retracement to $92.10) the ‘highest probability’ trade (though not the most profitable trade) of the day, since we had an Elliott Wave structure overlying us, a nice retracement swing up into EMA resistance, and a clean doji formation.  The stop would be placed just above the 20 EMA and the target would be a test of the prior lows at $91.80 or just beyond.

In fact, at 2:00pm, a hammer candle formed (also on a positive divergence) which signaled an excellent exit (of the short-sale).

Price meandered about this level which now looked like a complete 5-Wave formation… which meant the best trade was to go long at the termination of the 5th Wave.

We got a nice pullback that nipped above both the 20 and 50 EMA… but notice the long, upper shadow candles where price failed to overcome this level – signaling an exit for your long trade.  Price then plunged into the close, a testament to the higher trend in force.

Look back to my prior Elliott Wave “cheat sheet” on “The Best Trades to Take using Elliott Wave” and I describe the (in this case) short-sell the 4th wave after you recognize a big possible 3rd wave and then buy long once you feel the 5th wave down has completed – today’s price action gives a great example of this principle.

For those interested in Elliott, refer back to my prior two posts:

Elliott Wave Introduction Cheat Sheet
Elliott Wave #2:  Wave Labeling

as well as a prior intraday post similar to this one entitled, “Perfect Intraday Elliott Wave Example and Lesson” from May 22nd.

Do you have to use Elliott Wave intraday?  Absolutely not, but I’ve found it gives a little more confidence in the trades I’m already taking such as bull and bear flags along with divergences.  It just adds one more tool to your growing toolbox of trading strategies and tactics but – of course – is by no means required.

For those who are really interested, you may view 10 Free Lessons on the Elliott Wave Principle as taught by Robert Prechter by joining Club Elliott Wave International.

You don’t have to know all the rules of Elliott to trade successfully – focus on the big picture instead of the intricate details.

Corey Rosenbloom, CMT

Follow Corey on Twitter:  http://twitter.com/afraidtotrade