Rare Intraday Mirror Image

Could anyone have predicted we would have a mirror image rise of yesterday’s decline?  What a weird way to follow-up a large scale down day in the market – with a move of equal size in the opposite direction!  Let’s zoom in to see this as it transpired and note key points in the price struture that offered good opportunities.

DIA 5-min:

The black dotted line at the top represents yesterday’s close which was again tested today, marking a shocking and perhaps unexpected reversal and leaving many people wondering “what’s up with the Stock Market?”

Again, yesterday’s price action was a Trend Day down (a forceful one) and the bias was to the downside going into today.  However, price managed to zip into an overnight gap greater than $1.00 on the DIA (reduced odds of filling) which actually did manage to fill and reverse right at the lows of yesterday, filling the gap.

Price retraced in a ‘flag’ style pattern up to the confluence of the 20 and 50 EMA forming a potential bear flag pattern… that failed miserably.  Price chopped for the noon hour and formed a rectangle pattern and “Bollinger Band Squeeze” play (not labeled) and price reversed its trend and closed higher on the day.

It’s at this rectangle zone where the churning and ‘line in the sand’ occurs.  The expectation is that price will break downward out of the consolidation, resuming its trend, and testing/exceeding the lows.  A stop would be placed gently above the 50 EMA.  However, price broke to the upside, surprising the shorts and forcing them to cover which helped drive price higher into the close.

Again, the “Bollinger Band Squeeze” trade is classically unbiased in its direction, and asks you to place a buy stop above the squeeze (or rectangle in this case) and a sell-short stop beneath it, with the opposite side acting as a stop-loss once a trade is triggered.  Generally, it’s good to hold the trade as long as possible, or in this case, until the close.

That’s really the only way you could have participated effectively (with an ‘idealized trade’) in the end-of-day rise, as there were no clean retracements to get you in (long) safely.

Sometimes the market will do seemingly strange things to make sure you’re awake.  Wednesday was such a day.  Continue studying the day’s action for additional insights.

Corey Rosenbloom
Afraid to Trade.com