Monday’s Intraday Trading Tactics

Jun 30, 2008: 5:16 PM CST

Today’s action slammed both bulls and bears… more than once!  It was another rough trading day, which can be expected during the summer months of low (relative) volume.  Let’s view some of the price structure trades that could have been taken, in an effort to familiarize ourselves and trade more appropriately next time.

Let’s use the DIA 5-min chart as our trading proxy:

They day ended as a ‘doji’ or ‘indecision’ day (which could also be called a range or consolidation day).  Also, the day was just shy of being classified as an ‘inside’ day on the daily chart.

The day opened on all the indexes with an opening gap, which was quickly filled.  The range was around 150 Dow points ($1.50 DIA) which allowed plenty of trading opportunities, though not all trades ‘worked’ as expected.

1. With a new momentum low and a large impulse down, one would expect price to inflect off yesterday’s close, which also happened to correspond with the 20 and 50 period moving average.  A proper trade was to short at this level.  Unfortunately, not all trades work and the market is beyond our control, so after a slight red candle (triggering short-sales), the market rocketed higher to make a new momentum high on the day and stop-out all those properly executed short trades.

2. Momentum then began to diverge negatively, as price failed to clear the $114.20 level with any conviction, and a triangle consolidation pattern formed on the index, which set-up a ‘breakaway’ or ‘range expansion’ trade – in this case, price expanded to the downside, as was hinted by the negative divergence.

3. Price formed a large volatility move down which found support at yesterday’s close, setting up the short-sell exit and triggering a potential ‘buy’ trade to target the moving average consolidation zone, which worked quickly.  Price then formed a 45 degree angle movement (retracement) back up, which set up the final structural point of the day.

4. The violation of the parallel trendlines signaled entry for a ‘bear flag’ or ‘measured move (A to B equals C to D) style trade which targeted the $113.20 area (which was achieved quicker than expected).  One could have also targeted yesterday’s close as a potential ‘trade exit’ or target.

It was an interesting day with clean set-ups, but not all ‘idealized’ trades worked as planned, which is fine.  It was a relatively difficult day in the indexes, but all in all, price failed to close far from where it opened.

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