Looking Inside Friday’s Intraday Reversal

Feb 28, 2009: 7:10 PM CST

Friday was a monumental day in so many ways, primarily because the S&P 500 closed at a multi-year low.  Let’s step inside that intraday structure and see how the day developed and how we might have traded within the intraday timeframe.

DIA 5-min chart:

I’ll be honest – this was a very difficult day (at least for me) to trade.  The initial gap (and breaking of the November low on the S&P 500) led you to believe we could have a powerful trend day down (as bulls threw in the towel) so it made sense to try to short any sort of pullback to the 20 EMA, namely that of the 10:00 and 11:00 hour – neither of which gave satisfaction.

Next, the gap was slightly beyond the $1.00 threshold which meant the gap became a ‘large-scale’ gap and thus less likely to fade… but it wound up fading.

So as price made it back to fill the gap and find resistance at yesterday’s close, those were also excellent shorting opportunities, but price remained flat.  Some investors might have figured “bulls pushed prices back above the lows so maybe the so-called “Plunge Protection Team” stepped in and I should be buying/getting long.”  That failed as prices broke to new lows at the end of the day.

There was even a head-fake that trapped both sellers at 1:30 (triggering shorts) and buyers as the price turned quickly positive on the day (at 2:00).

The point is – this day whipped everyone around up and down and was quite difficult.

Oh, in hindsight, the picture is abundantly clear and the structure is obvious – we had an initial gap down which was gently filled and supply gently overtook demand as the day turned down, forming a type of “Rounded Reversal.”

I figured out the structure with 30 minutes to go in the trading day and managed to capture the end-of-day bear flag short-sell (into EMA resistance), but otherwise was chopped around as price consolidated and formed its range for the day.

And that’s exactly why I do these end-of-day “Idealized Trades” posts – because the more you work with price structure and highlight (to yourself) key trade set-ups, the more you’ll internalize these patterns, see the structure developing during the day, and act in real-time upon these opportunities.  I highly encourage you all (who trade intraday) to do the same in your end-of-day reviews.

Corey Rosenbloom
Afraid to Trade.com

17 Comments

17 Responses to “Looking Inside Friday’s Intraday Reversal”

  1. Matt Says:

    keep up the great work

  2. Richie Says:

    Excellent post. A good example of stepping back and seeing a late day pattern that you can easily miss.
    Might be a good idea for a trader to keep a list of potential patterns and continually scan through them during the day.

  3. Anonymous Says:

    It seemed to me that IBM was being used to keep the market from tanking. It started straight up shortly after the open, went vertically up about $4.00, and held up there for most of the day. When it finally started down a bit, that is when the reversals began. Since it is so heavily weighted, it can sway the markets in either direction. This kind of huge move is unusual for IBM without any more new news. Even when it goes up that much, it zig-zags upward, not a straight vertical climb. It might be interesting to try to do a comparison of IBM recently against the DOW and the S&P. Food for thought.

  4. Anonymous Says:

    http://tinyurl.com/crr8rt

    I ran a comparison quickly on marketwatch. It’s the S&P with the DOW in green and IBM in red. Notice that before the Sept. to October collapse in the indices, the DOW was mostly below the S&P as the banks had more sway on the DOW back then. After October’s low, the DOW is higher than the S&P, as the banks now represent so much less and IBM so much more. Interesting to say the least. I think it needs further study. KEEP IN MIND ONE THOUGHT, THOUGH. IBM HAS HUGE PENSION LIABILITIES. If these blow up, what might the DOW and the S&P look like then? Perhaps even IBM becomes too big to fail???

  5. Corey Rosenbloom Says:

    Thanks Matt & Richie.

    I think you have a great idea there. I’ve written specific trade set-ups into my trading and business plan and only trade those when they appear. Doing these end-of-day posts (privately at first and then publicly) has solidified these patterns to me and has helped immensely during the real time market action.

    The more we see these things, the better we’ll be. History does repeat!

  6. Corey Rosenbloom Says:

    Anon,

    You’re certainly right. The Dow would be quite a bit lower without the $10 IBM has managed to gain in the last 3 days. Sort of some behind the scenes action going on there perhaps. Nice catch.

  7. Corey Rosenbloom Says:

    My gosh I don’t even want to go there!

    Excellent chart and link – I shortened the URL for you and encourage readers to visit the chart link.

    I’m worried about the Dow Index either becoming irrelevant or being changed dramatically (as in replacing 4 or 5 stocks). I’m sure the government is aware of how IBM affects the Dow and how the Dow is viewed worldwide (the mass public considers the 30 Dow stocks – because they’re shown on TV so much – to represent the whole market).

    Might not be a bad idea to go long IBM and benefit from the … tricks?

  8. gmarg Says:

    Nice review. Of course not an easy day.

  9. piazzi Says:

    Hi Corey,

    In situation like this is where Elliot shines, shortly after mid-day it was apparent that the rally was corrective an not impulsive

  10. NotAfraidofTrend Says:

    Thanks, Corey, for an excellent review of the nerve-wracking day. However, some many reasons, retest of the morning low seemed inevitable.

    Looking into the future, now that wave 5 appears to have been confirmed, at least for DOW and S&P, what is your longer time frame target for E-mini futures? 550?

    Also, what is the likelihood of an imminent snap back rally, of the kind, of 150 S&P points, that took place after November low, that shot and killed many bears?

    AIG, GM and Citi are taking the whole market as hostage, with the help of the government. IMHO, these companies should be broken down into many smaller companies, lumping losses into one or two of the broken down companies. The losers should then be allowed to fail. Hopefully, the profitable portions of these businesses could then at least continue.

    Is the market so news driven that TA is getting confusing?

  11. Anonymous Says:

    how do you draw those rounded reversals. With what type of trend/drawing tool. and what software you use for your drawings? thanks and keep it up

  12. Corey Rosenbloom Says:

    Piazzi,

    True, the more I’m applying Elliott in real time, the better I’m becoming and more able to recognize the developing structure. Not always right but I’m definitely improving!

  13. Corey Rosenbloom Says:

    Anon,

    I’m using Snag-It Software which allows you to draw the arcs.

    Thanks for reading!

  14. Corey Rosenbloom Says:

    NotAfraid,

    I kept thinking the lows would certainly be tested again but couldn’t be sure because stranger things have happened to take the rug out from under the short-sellers.

    I would say the S&P 500 target – if we break lower here – would be more in the 650 neighborhood, which the the 61.8% Fib retracement from the 1982 low.

    Odds are quite good for a snap-back rally in my opinion. This bear is long in the tooth and it wouldn’t take much to throw the market out of balance back to the upside, but I thought the stimulus plan would be the thing that did it. I’m not so sure anymore.

    TA actually is working quite well but I keep overruling it at times, fearful for those surprises like the government banning short selling (on financial companies). I hate to say ‘you can’t trust the government’ especially speaking from the perspective of a short-seller (aka the bad guy!) but shorts just have to be extra-careful in this market. The signals seem to be working as long as there are no major surprises.

  15. Corey Rosenbloom Says:

    Oh, but to me, technical analysis is all about assessing the odds and probabilities. If an unexpected news even happens (and it’s against you), then you take your stop and move on. TA helps determine structure and edge – never certainties.

  16. piazzi Says:

    Corey,

    In my not so humble oipinion, only liers get it right all the time 😉

    the point is to make money on balance, right or wrong statistics do not really matter in this game, the take home does

    you do fine, and teach us all a point or two, very generous of you

    keep it up!

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