Quick Intraday Structure Overview

Jul 14, 2008: 11:15 PM CST

Monday’s trading was surprising both to bulls and bears – opening with a large overnight gap which was quickly faded, and price closed near the lows of the day.  Let’s look at the structure and possible trading opportunities that presented themselves.

DIA 5-min chart:

With price opening with an overnight (over-weekend) gap, odds are favorable that the gap will fade, but less favorable with an opening gap greater than $1.00 (100 Dow points) which was the case today.  Despite this, the market quickly faded the gap with little effort and only one retracement (which set up a quick bear flag – not labeled).

Price then found support (the target of the fade) at yesterday’s close and then bounced again, only to retest yesterday’s close to form a coil, or specifically a ‘descending triangle,’ which was broken solidly to the downside for a quick trend/momentum move down.

Price made new lows on the day with a surge in volume, complete with a new momentum low, stating odds for lower prices were yet to come.  Price retraced back to the falling 20 period moving average, setting up a quick high-probability ‘scalp’ style trade which achieved its target.

This new low on the day was met with lower volume and a rising (positive) momentum divergence, which clues us in that lower prices may be more difficult for sellers to obtain.  It never ceases to amaze me how many intraday lows (or highs) are formed on volume and momentum divergences such as today’s action.

Price then formed a bullish hammer candle and “hammered out a bottom” (as they say) and rallied up to re-test yesterday’s close before failing back to form a higher low on the day and then bulls gathered the necessary strength to take the day back to the positive side of the ledger.

As quick as the end-of-day surge (gains) came, they were over just as fast and price closed at the lower range of the day, confirming the bearish bias on the daily chart.  We keep waiting for an ‘oversold bounce’ but buyers don’t seem to be able to step up the pressure (as of yet) needed to push prices higher.

Today’s action had some good opportunities and good educational examples that are worth further study.

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