Rounded Reversal Structure Underway

Nov 14, 2008: 3:02 PM CST

Today’s US equity index markets completed a classic “Rounded Reversal Day” pattern worth examining.  Let’s see this pattern and also view the “optimal entry point” that confirmed that this structure was likely forming.

DIA 5-min intraday (incomplete) chart (courtesy TradeStation):

The day opened with a downside gap that quickly filled (or actually came just shy of filling) and then price began moving lower on the day after forming two ‘shooting star’ type candle patterns (indicative of potential bearish reversals near resistance via yesterday’s close).

Price then moved to the confluence of the 50 period EMA and the “Daily Pivot” price (the horizontal dotted line – simple pivot point analysis).    After making an attempt to support here just beneath $86.00, price eventually broke to new lows but did so on a clear positive momentum divergence (around 11:15am).

It’s surprising to me (or perhaps it shouldn’t be) how many intraday lows (or highs) are formed with some sort of momentum oscillator divergences, and today was no exception – provided price does not plunge in the last trading hour (UPDATE … which, quite shockingly, is exactly what happened).

Price then broke above both the 20 and 50 period EMA after the divergence, signalling potential bullish strength, or at a minimum the need to ‘cover short positions’ at that time.

Price completed the next down-swing to form a higher low in price and subsequently the momentum oscillator as well, hinting at possible ‘hidden’ bullish strength building.

The next up-swing was powerful, taking price once again above the flat EMAs and making a new swing high and officially reversing the day’s trend from down to up (after having made a higher low and then taken out the prior swing high).

I labeled the $86.00 ‘hammer’ candle at confluence support AFTER price etched out a freshly confirmed up-trend as being the “highest probability entry” because the structure now favored higher prices yet to come.  Also, should price have broken down beneath those levels, a tight stop could (or should) have been used to limit losses were the price to reverse back to the downside, giving you a low-risk, high reward opportunity.

As price held support, the odds for completing a “Rounded Reversal” Day were highest and that is what price achieved, forming a sort of ‘saucer’ bottom or as I like to call it, a “Rounded Reversal” pattern. Let’s see how this day plays out but for now, today’s action so far gives you a near perfect example of the “Rounded Reversal” Pattern.

10 Comments

10 Responses to “Rounded Reversal Structure Underway”

  1. Anonymous Says:

    There were clear signs to close that position for a profit, (which was very similar to the position I took today) later in the day. Stretch the chart out to today and yesterday, and compare yesterdays closing high with today’s intraday high. There was a negative divergence in the MACD(12,26), with momentum making a lower high today than yesterday. That alerted to me that the index might not hold a new high – I tightened my stop from the 50 MA to the 20 MA. Shortly after, the DIA (and SPX which i traded) fell through their 20 x 5 minute MA’s where I had a trailing stop.

  2. Corey Rosenbloom Says:

    Anon,

    That price level – roughly 8,900 – was key resistance via the falling 20 day EMA (daily chart) but I saw a decent chance of us perhaps clearing that. I’d closed the trade prior to the intraday peak just about when price started its retracement as seen in this chart (and I had to blog to keep myself from getting greedy and overtrading/chasing the market).

    I missed seeing the negative divergence you mentioned which also would have been a good sign things weren’t as positive as they seemed.

    You played this well. We take our stops because they are protection against large moves like today that can happen – I guess literally – at any moment. Thank you for your comment.

  3. Anonymous Says:

    Has a descending triangle formed on the S&P?

  4. Corey Rosenbloom Says:

    Anon,

    I think you could make that argument, yes, about the 850 Index level. If this indeed is the dominant short-term pattern, the height would be from 1,000 to 850 or 150 points, which subtracted from 850 would give a downside target of 700 which would take us beneath the 2002 bear market low. We need to watch for this possibility, which would likely become the dominant pattern if 850 was taken out. I truly thought we’d get a support bounce off these levels but that’s why we take it day by day.

  5. Alex Says:

    Corey, one question, what do the little green and red spots in your 5 min chart represent? How do you calculate them?
    Cheers
    Alex

  6. Corey Rosenbloom Says:

    Alex,

    Those dots are called “Pivot Highs and Pivot Lows” and come default with TradeStation as a “show me” study. They don’t show up in real time (I wish they did) but require a function of price movement a certain distance before plotting a dot. I use them because it allows for ease in comparing swing highs and swing lows in terms of price structure or trend analysis. They aren’t useful as trading signals unfortunately.

  7. Anonymous Says:

    Corey, I just notice first time today that the 5-min 20&50EMA on your tradestation chart and stockchart are different than mine. After some closer look, it turns out because my software doesn’t include the 15 minute bars after market close at 4pm EST. It became a problem today after yesterday spike in price before market close causing large gap between EMAs and the price. I did not get a signal on the 20EMAs at 9:30 and 10:20 like you did on your chart. Do you think the EMAs are more accurate (meaning more people using it) with the 15 minutes after market close included?

  8. Corey Rosenbloom Says:

    Anon,

    This is probably the biggest complaint I have with StockCharts.com data, and I’m currently unaware of how to turn the selection off. I really love the look and feel of their charts but they include data after the market officially closes, which throws off indicators. I’d prefer they not do this.

    The TradeStation chart represents the true market open and close (9:30am – 4:00pm EST) which is a more accurate reflection. As such, that is where I make my trading decisions. I do analysis and publications off of StockCharts, but real time decisions are made off TS. There’s additional slight differences (such as how both vendors treat price spikes), but I just feel more confident using TS data but don’t like the way their charts display in my posts.

    If anyone knows how to better improve StockCharts data, or how to view only actual market data (not pre or post market), please let me know.

  9. Anonymous Says:

    Wait, are you saying that the TS chart above doesn’t include after hours? I am using IQFeed/Quotetracker and the 20EMA on Thursday close (4pm EST) is around 85.8 on the DIA. Your TS chart’s 20EMA above has 86.7 at the start of the day. It doesn’t seems right. I assume your green line is 20EMA, right?

  10. Corey Rosenbloom Says:

    I think in this case I actually did. Before the screen-cap, I switched to “Regular Session” view to take it off the 24hr futures data chart instead of my custom session, and the TS ‘default’ regular sessions ends at 4:15 EST. The custom settings I use do not include the last few bars but their regular session does. I’m so used to working off futures data in TradeStation and should have selected my ‘custom session’ instead of ‘regular session’ setting. My apologies. The green line is the 20 period EMA, yes.