Shocker of a Day! Intraday Action Revealed

Jul 1, 2008: 4:14 PM CST

Today was quite the interesting and surprising day in the major US Indexes.  Why?  They flip-flopped more than a politician campaigning.  Let’s reveal the intraday action and see if there’s anything we can learn from today’s action.

DIA – Dow Jones 5-min chart:

There really is so much to say about today’s action.  Let’s start with the obvious – the Gap Fade.

The first play when there’s an overnight gap is to try to fade the gap back to yesterday’s closing price.  This strategy tends to have dual edge in the form of producing winning trades more than 50% of the time, and producing larger winners than losers.  This was the case today, despite a relatively large gap (greater than 100 Dow points).  I have trouble fading such gaps with confidence, but odds still tend favor filling over not.

After a large volatility bar took you to a profitable exit, the market rolled back over sharply to the downside as expected, but then rocketed unexpectedly back to the upside, leaving many traders (especially those with tight stops) bewildered.

Price then found resistance at yesterday’s close (which is the expected play after a gap) and then formed a ‘shooting star’ bearish candle before rolling back over strongly in the direction of the original gap.

After making new lows on the day past noon, a positive momentum divergence formed, and a small consolidation pattern, which I interpreted at the time (especially on the SPY chart) to be a sort of bear-flag pattern, which actually broke strongly and shockingly to the upside, triggering a ‘range expansion’ trade (though in the opposite direction as expected).  That’s why it’s often critical to wait for the break of a consolidation pattern because it’s impossible to know which direction price will break.

After surging higher than expected, and violating key moving averages to the upside, price rotated back to the downside before ramping back up into the close – with all the wild action, the fact remains that the market closed on its highs of the day, providing a bullish catalyst, especially in the face of potential Fibonacci support from the monthly 38% retracement.

The SPY chart tells a similar story, though I have added a few more annotations:

For those keeping track at home, the 1,260 level on the S&P 500 chart represents the 38.2% Fibonacci retracement off the 2002 bear market lows.  Coincidence?  My guess is that many funds had buy orders at that level and see it as a bargain area and expect selling to cease there – temporarily, it did.  Let’s see if that level holds.

The S&P 500 was 4 points away from making a new low for 2008.  Surprisingly (or not so much), the hammer candlestick at these levels represents a strong short-term buy signal (in addition to the oversold signals registering on most oscillators).  Don’t be surprised to see a (potentially strong) bounce off these levels.

Remember that trading will be light during this holiday week, so market moves may be wild and volatile.

Be safe out there, no matter what your bias remains on the overall indexes – there’s risk in playing the market both ways here.

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