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