Revealing Intraday Patterns in the DIA

Dec 29, 2008: 8:13 PM CST

I could write a lengthy synopsis of the trading activity in today’s (Monday, Dec 29, 2008) market because there were so many fascinating examples of price action concepts (and patterns), but let’s focus on the key points and delve into the intraday structure in today’s DIA action.

DIA (Dow Jones) 5-min chart:

The day began just above $85 per share and then plunged almost non-stop from there, forming a large momentum swing down which created a new momentum low just after 10:00am.  Price then formed a mini-positive momentum divergence into an “ABC” Bear Flag correction into key resistance via the falling 20 period EMA, as price formed three narrow-range doji candles in a row.

If you can find set-ups like this, you’ll need to trade them aggressively, perhaps on leverage.  This is the classic “Impluse Sell” trade which is confirmed by price retracing to a key moving average and forming corresponding (confirming) reversal candle patterns.  Not only do you have a probability edge, you also can generate a size edge, meaning your stop (which would go just beyond the falling 50 period EMA in this case) would be much smaller than your target, which is roughly a ‘measured move’ of the prior impulse.

Ultimately, price did not complete a full projection (to do so, it would have needed to travel roughly $1.00 lower.  It only managed to achieve a $0.70 move), though price did provide profit to those who shorted at the $84.30 zone.

We then formed a positive momentum divergence and an ‘engulfing’ candle pattern that swallowed the previous two bars before sharply reversing to the upside and breaking the 20 period EMA (falling just shy and sustaining resistance at the 50 EMA).

Price then formed a near-perfect symmetrical triangle into support before breaking out into a forceful “Third Wave” impulse which terminated just shy of the 200 period SMA.

Price retraced back into a bull flag (not drawn) which found key support at the Convergence Zone (bullish cross) of the 20 and 50 EMAs – a trade that I’m still looking for a name to classify it.  I believe these are some of the the strongest trade set-ups you can take when they occur.

Nevertheless, price burst out of the “Corrective Wave 4” consolidation to reach resistance back at the $85 level, which is roughly where we began the day, and terminated in a “Fifth Wave” completion into the close.

Look closely at the Elliott Wave-style pattern that emerged from 1:30 to the close – to me, it reflected a perfect example of the Wave Principle playing out on a 5-minute (fractal) chart.

There was so much more to discuss regarding the intracacies of Monday’s action.  Continue to study your own charts for additional insights, with the goal being the internalization of these patterns so that you can react better when they occur in real time.

Corey Rosenbloom
Afraid to Trade.com

12 Comments

12 Responses to “Revealing Intraday Patterns in the DIA”

  1. piazzi Says:

    great post, corey.

    I only have one comment, EW does not allow a wave 2 to be a triangle triangle in a second wave. They can be part of a second wave, but the entirety of it

    regards,

    piazzi

  2. Corey Rosenbloom Says:

    Piazzi,

    True – though the symmetrical triangle actually occurred during the fractal “C” wave of Wave 2. There’s an “ABC” Pattern to the 2nd wave, though I chose to include the bottom of the “B” in drawing the trendline.

    Second waves tend to be more ‘sharp,’ or violent than fourth-waves which tend to allow for triangles and more gentle corrections.

    PS – I noticed I had entered your link into my blogroll incorrectly – I have corrected this. You have a great site that I would encourage readers to visit.

  3. piazzi Says:

    Thank you Corey, I have also added your blog to my blog roll. You have a great analytical eye for setups, and are typically very thorough. I have been a long time reader, only the first time I commented since I thought I has something to say 😉

    BTW, do you mind if from time to time I reference part your post (with full links abd credentials of course)?

  4. David Says:

    Thanks Corey, I have to say i count myself a holiday maker at the moment , this is just sooo boring.

  5. David Says:

    I mean the market not the post :o)

  6. Dominick Says:

    Hello Corey, excellent post as always. From a students perspective(which I consider myself)anaylsis such as this, specifically the examples provided, is always exceptionally helpful in reinforcing trading skills. Can you provide any clues you may have had as to which way the triange may have broken? Divergence, trend, etc.

  7. Corey Rosenbloom Says:

    David,

    I took last week off of trading and was happy I did. Today was a good time – for me at least – to jump back in with small positions to get back in the game. Strangely, there were great opportunities in today’s market – I expected more ‘flatness’ but am anticipating a breakout move soon.

    Don’t worry – eventually the market action will pick back up and fun (volatile) times will return to us soon.

  8. Corey Rosenbloom Says:

    Piazzi,

    Thank you for reading for so long! I’d love to have you comment more – I’m thoroughly impressed by your work as well. You put great detail and information into your posts that are most helpful.

    I would be honored if you used/linked to any work. I will do the same with you from time to time as well.

  9. Corey Rosenbloom Says:

    David,

    From an ‘at the moment’ or ‘real time’ perspective, I try not to predict the outcome of a price consolidation or triangle as we had around 3:00. Truth be told I was bearish and expected a downside resolution thanks to the prevailing trend for the day and twice-tested resistance from the 50 period EMA. I play triangle breaks, not inside triangles, so that kept me out of a losing trade.

    Price breaking upwards out of the triangle, breaking the 50 EMA, then doing so on high (relative) volume on a new momentum high were all the clues we needed to shift the odds to the bulls (for higher prices likely yet to come). It turned out to be EW 3, though it’s quite difficult to anticipate that at the time. Waves 4 and 5 are often more clear and offer better trading opportunities (in my opinion).

    I still think the best trade of the day came at EW 4 (at 3:30pm) when price confirmed a new uptrend, the moving averages ‘crossed bullishly,’ and price retraced to test the solid (confluence) support. It allowed for a tight stop parameter if price continued lower, but allowed you to play for a target larger than your stop, or exit on close (for day traders). Ultimately, it was the Fifth Wave or also the completion of a mini-bull flag into the close.

  10. Dominick Says:

    Corey, I also thought the triangle may have broken to the downside due to the trend. It is comforting to know I am on the same page as you. As for the “how to” of playing the triangle break, would a strategy have been to place a buy order(stop) short in the 83.90 to 83.80 range pickup a fill and ride it down? Your thoughts?

  11. Corey Rosenbloom Says:

    Dominick,

    That would have been an acceptable strategy, so as not to enter *in* the consolidation and then be triggered with a stop-loss above when the breakout didn’t go as expected.

    I would suggest treating consolidation patterns (triangles) just as that – just like a rectangle where we know a break will occur, but we don’t know which direction.

    I would suggest a bracket order, such as a buy stop (long) about $84.05 or so and then a sell-short stop at $83.85 or so, both depending on your risk tolerance. Automatically, once one order is triggered, the other would become the stop-loss. I find that playing ‘neutral’ bracket strategies works better because it helps eliminate bias and allows price to ‘pull you’ into a trade.

  12. piazzi Says:

    It would be my pleasure to link to your work, You do very good work, it may make me look smart 🙂