Intraday Reversal Action Stuns Traders

May 19, 2008: 8:20 PM CST

Today’s action was stellar both for the bulls and the bears, turning what looked like a trend day up into yet another end-of-day sell-off into the close.  Let’s look at some possible trade ideas that you could have taken within this structure.

I had expectations for price movement to the downside at the open, but those were quickly destroyed as price surged higher after an initial pullback into moving average support.

The first ‘ideal’ trade would have been the pullback to the 20 period moving average and the break of the ascending triangle pattern around 11:00 which called for a potential ‘measured move’ of the prior price action.

A second style flag formed around noon (which was the profit target for the prior trade) which also broke to the upside, but the higher prices formed a lengthy negative momentum divergence, which resolved with force to the downside as price violated first its 20 and then 50 period moving average.

Aggressive traders could have played off this momentum divergence, but there was little justification to play for such a large target as the market gave us.

Price then retraced rather cleanly into the ‘zone of confluence’ where the 20 and 50 period moving averages crossed, which set up a very high-probability trade to the short-side (which could also be identified by doji patterns at resistance, and could have even been called a ‘bear flag’ which fell just shy of its target).

I actually drew the ‘bear flag’ pattern, where the measured move would have taken price down to yesterday’s close but the 200 period moving average contained price and formed a potential bear flag into the close.

The action on the NASDAQ (QQQQ) chart was a bit more painful for the bulls:

Without delving too deeply, a rising wedge-style formation persisted as each higher peak in price was met with a decline in the momentum oscillator until the divergence gave-way to starkly lower prices (and a similar bear flag style pattern).  The NASDAQ actually closed lower on the day, while the Dow was buoyed by strength from Exxon Mobil (XOM) and Chevron (CVX) – crude oil prices hit yet another high this afternoon.

With the indexes at resistance, and such a harsh sell-off as we experienced today, it will be interesting to see if the bulls (buyers) can muster any sort of recovery in the face of these factors.  Let’s see!

4 Comments

4 Responses to “Intraday Reversal Action Stuns Traders”

  1. Richard Says:

    Risk aversion increased today as the financial sector, XLF, fell 1%, and this caused a sell off in the Nasdaq shares, QQQQ, and the Nasdaq, 100, QTEC, as liquidity that had come via the Fed’s TAF, TSLF, and PDCF facilities pulled out.

    The risk aversion caused a shooting star explosion topping-off of two groups: First, the interest rate differential darling ETFs and stocks — the yen carry trade favored investments, such as the BRICs, South and Latin America. And secondly, the utilities, transports and industrials.

    The red hot Nasdaq having turned lower today, will continue to do so; the emerging nations, utilities transports and industrials will follow later this week.

  2. Joe Says:

    Corey,
    How much do you personally trade with the MarketClub methodology versus your own technical analysis based trades like flags etc.?
    Thanks, Joe

  3. TraderMD Says:

    Corey,
    Thanks for the addition to your blog roll.

  4. Corey Rosenbloom Says:

    Joe,

    Personally, I use the MC site for stock scans and confirmation of what I’m seeing in the indexes or futures markets. You can’t scan for flags in MC, but you can scan for stocks that have been strong over a certain period and then either visually inspect pullbacks or create a watchlist with stocks that might be pulling back to form upcoming flag continuation (retracement) patterns.

    I trade the index futures primarily but am working on different portfolio ideas and the scans and MC watchlist and technical criteria help me in that regard.