Fascinating Intraday Action

Apr 15, 2008: 6:20 PM CST

As a trader, I thoroughly enjoyed today’s intraday swings and price action. Let’s take a closer look:

The day began with an overnight gap just outside yesterday’s range (just above yesterday’s high) and immediately filled, giving the first opportunity of the day for a high-probability trade.

When the ‘gap fade’ trade ended, one could have played (long) in the direction of the original impulse, which only gave a 50% move before reversing and breaking the lower trendline of a new bear flag pattern which terminated just above moving average resistance.

It’s impressive that the intraday low is formed at the termination (completion) of the ‘measured move’ of larger bear (and bull) flags, and this was indeed the case with this flag which actually spanned the intraday high and low.

The rest of the day’s action rotated within these ranges, turning back up in a ‘rolling bottom’ pattern which took price above the key moving averages (I would have expected more downside at moving average resistance. Price rejection of further downside laid the ground for shorts to cover and new longs to enter, providing a ‘pivot point’ or turning point for the day).

Price then surged above the averages and found scant resistance around yesterday’s close while forming a new bull flag which quickly got its ‘measured move’ before reversing down to find support yet again at yesterday’s close.

Price made a final push to the upside and formed a more manic bull flag which also achieved its target.

There were other opportunities in the action of the day that I haven’t highlighted (or else the chart would be full of annotations) so I suggest you print out today’s action and apply your own analysis based on your experience and insights.

As always, feel free to check out educational resources from INO TV (video education from top traders) and Market Club (analysis, trading signals, scans, portfolio, etc).

Be careful, as this week has been deemed an “Earnings Week!”


Gap Fade Becomes Bear Flag

Apr 15, 2008: 11:07 AM CST

Today’s trading so far has been a dream come true for me. My two favorite patterns have played themselves out ultra-cleanly and as close to text-book as you can get.

Let’s see what I mean:

Earlier, I pointed out the Gap Fade Trade the market gave us like a gift this morning. The market wasn’t finished giving – that’s for sure.

The second set-up of the day came in the form of a rather massive and sudden bear flag which rose just above moving average resistance.

I describe more detail about this set-up in my educational post “How to Trade Bull and Bear Flags.”

As much as I have learned through education and experience, it seems strange that these two extraordinarily simple patterns and set-ups have made me the most money in my account this year.

I keep wanting all these esoteric and complex strategies and indicators to make it worth what I have learned about them but it often pays for retail traders to stick to simple knowledge and set-ups.

The more you see these patterns play out, the more confidence you’ll have in yourself when you perceive a pattern unfolding and you will join in with less hesitation.

Each time you see a clean or interesting pattern you recognize, print out the chart at the end of the day, annotate the pattern, and keep a ‘hard copy’ folder (or file) that gives you easy access to all the times you’ve observed the set-up.


Market Cleanly Fills the Gap

Apr 15, 2008: 10:07 AM CST

Today’s price action so far has been nothing shy of stellar and ideal for those who love to ‘fade the gap’.

If you would like to know what a clean and ideal gap fade trade looks like, then keep this one for your records.

The market opened with a relatively large impulse up that was smoothly and quickly faded, with only two ‘up-candles’ on the way down (this is a 5-minute chart of the DIA – Dow Jones ETF).

Generally, I give 10 to 15 minutes (2 to 3 bars) before entering a gap fade and I place a stop 50% of the distance to my target, which is yesterday’s close.

In this case, entry would have been near $123.70 with a target near $123.20 (which is $0.50) and I would place a stop at or just above $124.00.

Recall that the reason I love gap fades is because they give a sort of rare ‘dual edge’:

First, the odds of filling (provided the gap is less than 100 Dow Points) are higher than 50% and

Second, the profit you gain when the gap fills is higher than the money you lose when it does not.

Also, gap-fades have the added benefit of being extremely easy to recognize, place targets, and stops and you don’t need a complex strategy or complex indicators.

For more information, see my previous posts:

Gap Fade Statistics for January (70% of gaps filled)
Gap Fade Statistics for February (53% of gaps filled)
Gap Fade Statistics for March (70% of gaps filled)

Gap fades are one of the market’s jewels in my opinion. This strategy likely won’t work forever, but in the current environment, it seems to be working quite handsomely for aggressive traders.


AAPL Pulls Back for a Potential Buy

Apr 14, 2008: 10:23 PM CST

Apple Inc (AAPL) – from a technical analysis standpoint – may be retracing enough for a potential buy signal, as I had highlighted previously.

Earlier in my post “Apple Continues its Ascension,” I hinted that APPL could be a potential buy if it were to pull back to the $140 area into moving average support. I also highlighted that this development (the pullback) was increasingly likely due to the extended price swing to the upside.

Now that price is coming up on the ‘buy zone,’ aggressive traders may want to watch this stock closer for potential opportunities. I would project support to be coming in from three sources:

The rising 20 period moving average
The flattening 50 period moving average
The 38.2% Fibonacci retracement (just above $142)

If you do decide to take a long (buy) swing-trade in AAPL, I would suggest that you stop be placed beneath $140 or perhaps as low as $135.

The Weekly chart also confirms these potential areas of support:

As always, if you feel this may be a good opportunity, but don’t feel you can purchase a $140 stock, consider using potential options strategies if you have used them in the past. Otherwise, you may try this trade in a demo or practice account.

(Disclaimer: I have no position in APPL stock)


Three Types of Morning Openings

Apr 14, 2008: 12:57 PM CST

Knowing how the market (or a stock) opens in relation to yesterday’s trading can give you a clue about what’s likely to happen for today’s trading. What are the three types of openings and what might they mean?

1. No Change

This is the most typical opening, where today’s open is either equal or very close to yesterday’s close.

When this happens, it increases the chance that the day will be more neutral or rangebound, and decreases the chance that the day will be a trend day.

2. Gap, But Within Yesterday’s Range

When a market gaps up or down, it is indicative that there has been some sort of supply/demand imbalance that has changed overnight. Perhaps it was a news announcement or some other stimulus, but the gap is not too distant from yesterday’s close.

It is often better to trade against the gap, betting that it will ‘fill,’ which can establish an early morning trade. These instances increase the odds that a gap will fill.

Also, odds still favor some sort of consolidation (or rangebound) day, but the odds for a trend day are slightly higher than for the typical (no change) opening.

3. Gap Outside Yesterday’s Range

Gaps of this nature show potentially significant supply/demand imbalance, or that a major announcement or event has changed the calculus of traders’ expectations. Perhaps one side is being ’squeezed’ and that the other side is showing dominance.

Gaps outside yesterday’s range have lower odds of filling, especially if they occur significantly outside yesterday’s range.

Such gaps increase the odds that the day’s trading will lead to a trend day, where the market (a stock) will open at one extreme and close on the other extreme. The odds that the day will resolve into a trading range are much lower than the other types of openings.

The type of morning opening gives you clues about what is likely to happen (or not happen) for the rest of the trading day.

For enhanced analysis, and education consider joining the Market Club! Also, learn lessons from master traders including in-depth lessons on how to trade overnight gaps through INO.com premium education.

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