Recapping Wednesday’s Price Action

Mar 26, 2008: 8:48 PM CST

Wednesday was a very interesting day in the US Stock Market Indexes. A few classical patterns played themselves out, which provided lucrative trades to those who were nimble. Let’s look at some of them:

This morning’s impulse gap down, with large range first 5-minute bar was the first clue that the day could be a potential trend-day down.

Recall that the first trade with a gap is often to fade the gap to play for a retracement (or closing) of the gap. Should your stop be hit, it can often signal a more powerful trade in the opposite direction, indicating that you should play in the direction of the larger impulse, which was stronger than the ‘fade the gap’ crowd.

If you missed initial entry, that’s fine. When there’s a strong impulse, the odds often favor playing against any reaction of that impulse. In this case, you should have been looking for a spot to “get short” the market.

One of my favorite patterns – the bear flag – set-up as price meandered its way back to the falling 20 period moving average (couldn’t quite make it there) and then broke the lower trendline, signaling entry (short-sell with a target of the initial impulse, or a “Measured Move”).

This trade worked out like a charm, and I highlighted this action earlier this morning on the open blog. I called for sideways action to occur, noting that the positive momentum divergence was likely to halt any further downside action. It turns out that the bear flag price target was actually the intraday low, which was quite unsurprising.

Price completed its ‘back and fill” and completed a “rounded swing” type pattern that created a lengthy positive momentum divergence (cluing you in to the potential of higher prices yet to come).

Those prices came swiftly into the 3:00pm hour, and were immediately reversed almost as quickly as they came! Nevertheless, you could have captured a small piece or ‘scalp’ of that move.

The market closed near its lows, meaning the bears (sellers) virtually had full control of the day’s sessions.

Price is consolidating, and the moving averages (on this time frame) are flattening out. Perhaps the market is waiting to digest the next bit of news that’s upcoming.

Stay on your toes and try to focus on the next probable swing, and mitigate risk accordingly.

2 Comments

2 Responses to “Recapping Wednesday’s Price Action”

  1. 10kthrownaway » Blog Archive » The 8:01 Report Says:

    […] Trader Eyal has a Piano Addict living above him Clear Channel, Bain, Lee sue banks over buyout plan Corey has a recap of yesterdays price action Merrill (MER) may write down $4.5 billion on assets Lower interest rates […]

  2. adam Says:

    noice new look, love it.