Market Rewards us with a Trend Day Up

The intraday action in the major US indexes was a gift in the form of a ‘trend day up’ structure, which occurs rarely, but offers us significant opportunities for profits.

Let’s peek:

Notice how the market (DIA ETF – 5-minute chart) gapped up, representing an initial momentum imbalance. A gap can serve as the first clue that the day has greater than normal odds of being a trend day.

Second, notice how the market was unable to fill the initial gap (which is perhaps the intraday theme of February so far), and found support at the 50% mark of the gap, which corresponded with the rising 50 period moving average.

Third, price trended higher and continued to find support at the rising 20 period moving average. The structure of the moving averages (20 above the 50 above the 200) gave us another clue beyond the ‘gap failure’ that today would be a trend day in the making, and that we should go ahead an establish an initial position and then trade around pullbacks to the moving average for the rest of the day.

We see the pattern continuing, as the market came back frequently to ‘test’ the rising 20 period average, which set up low risk (stop beneath the 50 period average) and high reward (retest of the recent swing-high or beyond) trade opportunities.

The Dow Jones Index ended the day 178 points higher (up 1.45%).

Also, let’s look at the DIA’s 30-minute chart for a quick lesson on the divergence resolution pattern:

See if you can ‘feel’ the positive divergence building, which resulted in the change of trend (short term) back to up. Notice how price kept making narrower swings and lower lows, but the momentum oscillator, which is more sensitive to price swings themselves, continued to make higher lows.

Lengthy divergences such as these often serve as counterpoints or turning points in the market, depending on what time frame you’re viewing. In this case, the building positive momentum preceded the actual price reversal.

Notice how the February 12^th gap took price cleanly above the moving averages which had previously served as support.

Price still has more to ‘prove’ to become declared as an uptrend on the daily chart, and I am classifying this recent move as a counter-swing up which could be setting up a more favorable price action in the future.

Time will tell, of course, but it pays to be one step ahead of the crowd if possible.