Intraday Rounded Reversal Example in NTAP Dec 11

Dec 11, 2009: 1:44 PM CST

A reader brought to my attention the intraday stock price of Network Appliances (NTAP) and I wanted to show its near-perfect example of a Rounded Reversal intraday structure transition.  Let’s see it on the 15-min frame.

(Click for full-size image)

Starting with the impulse bar and new price and momentum high (3/10 oscillator) on December 4th, price erupted into a new impulse/bullish trend phase that continued over the next few days.

Remember, new price highs combined with new momentum highs have greater odds of producing a higher price high yet to come… as seen here.

Price continued in a strong uptrend forming new price highs along the way… but on lower peaks in the 3/10 Oscillator.  Still, the basic strategy would be to buy pullbacks into the 20 or 50 EMA as shown above and play for a retest of a prior swing high or just beyond.

This continued until the negative divergence ‘caught up’ with price on December 9th, as price formed a quick thrust to new highs and produced a red doji at the upper Bollinger Band at the $33.70 price area.

This was an excellent low-risk, high probability short-sell to capitalize on an aggressive play to enter as the uptrend – long in the tooth on this timeframe – might be coming to an end or at least a pause.

As seen price did retrace but gave one ‘last breath’ to form a double top price pattern on the open of December 10th – the high so far.

If you weren’t stopped out here (stops for the rounded reversal pattern should go just above the bar you expect to be the high… so don’t panic in the event that a double-top like this forms), or if you weren’t short already, this gave a ‘last chance’ or ‘second chance’ to short the price with a tight stop above the opening high.

On the same day, price fell from its peak and then the 20 and 50 EMAs crossed bearishly – forming a “Cradle Trade” – at 1:00pm CST on December 10th.

Price then reversed into a downtrend, forming lower lows and lower highs and – with the exception of one quick burst – stayed under the convergence of the two moving averages which had shifted into a bearish orientation.

Short-term targets to play for include prior price support zones as seen above, and if the price pattern completes exactly, then we would expect to see a ‘mirror image’ decline of the prior rise.

This is a quick lesson in how to use concepts (divergences, drying up of demand, rounded reversal) and set-ups (dojis at upper Bollingers, Cradle EMA crossovers, double-top patterns) to execute a trading plan with ‘scalp’ (short-term target) trades or even a swing/campaign trade to play for a possible full move.

Corey Rosenbloom, CMT
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