Surfing the Trend Channel on Monday

Mar 9, 2009: 8:29 PM CST

What a day!  Monday’s (March 9th) intraday price action shows why it’s so important to go back and annotate the structure and “idealized trade set-ups” so you can recognize it quicker as it develops in real time in order to apply the most appropriate trading strategies early.  Let’s step inside Monday’s 5-min DIA action:

Let’s walk through the day step-by-step to pick up on its lessons and trading strategies.

The day opened with a downside gap just at $1.00 in the DIA which put it just on the threshold of successful odds of a fill… but this was perhaps one of the fastest ‘large-scale’ gaps I’ve ever seen fill.  Price filled the gap in about 20 minutes, and formed a doji at yesterday’s close (which often serves as resistance).

Instead of reversing down, price screamed higher and formed a negative momentum divergence and the intraday high (it’s surprising how many highs and lows are formed on divergences).

It seemed the doji at 11:15 which formed at the rising 50 EMA was a good buy – and it was from a risk-reward standpoint – but ultimately price failed to make a significant swing up off that proposed support level, and found resistance at yesterday’s close (which often serves as important support & resistance).

Price then broke above yesterday’s high, triggering thoughts of bullishness, but that wasn’t mean to be either.  We formed a quick as lightning Bear Flag into confluence EMA resistance, but you really only could have caught that if you weren’t taking lunch and were glued to your trading terminal – in hindsight, it looks great but the odds of capturing the profit (and target) in real time were very low.

Price rallied up off the bear flag price projection target and found resistance just above the “Cradle Trade” Zone (which also may have resulted in a stop-loss if you were playing to capture the Cradle).

By now, it became apparent to astute traders that a range had formed and the structure was developing a downward sloping consolidation, or more specifically, two descending parallel trendlines.  It takes four touches (or tests) to confirm a rectangle or parallel trendlines and we finally got that at 2:00 (making the 5th touch valid).

At this point, the trading strategy into the close favored playing the trendlines for support and resistance, which ultimately worked though price closed in the mid-point of the trendlines.

The more you analyze/study intraday structure, the better you’ll be at recognizing the day’s structure (trend day, rounded reversal, range day) as it develops and then adjusting your trading strategy (rely on indicators?  turn off indicators?  which indicators are the best given the proposed structure?) accordingly.

UPDATE: Reader Dominick mentioned a Measured Move (AB=CD) or Bull-Flag pattern and I wanted to show that on the blog.  There were actually two Measured Moves (AB=CD), one being comprised of the other.  Interesting view with all the indicators turned off!  Though I don’t show it, the 2nd AB=CD pattern contains a fractal AB=CD pattern.  The CD leg of the first AB=CD contains its on micro-pattern.  Like Elliott Wave, bear flags and Measured Moves can be fractal in nature.

For ease of mind, you can call all these Bear Flag patterns.

Corey Rosenbloom
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade
Register (free) for the Afraid to Trade.com Blog to stay updated

(Note – odds are I will be switching my intraday focus to the SPY instead of the DIA soon.  Comments/suggestions are welcome)

18 Comments

18 Responses to “Surfing the Trend Channel on Monday”

  1. Corey Rosenbloom Says:

    I had an email about a bull flag into the 11:00am hour and yes that would have been a bull flag set-up (good trade) that ultimately didn’t get its target and got stopped out.

    It was a day with very choppy, difficult to trade in real time conditions – almost all of which ended in a stop-out – though the day’s structure was 100% clear at the close and you look back and say “Gosh! Wow – how did I miss that?! It was so simple – look at those channels.”

    But ultimately it’s the real-time application that makes (or loses) money.

  2. Dominick Says:

    Fantastic anaylysis Corey. Thanks for the refresher. Also, could that whole structure, 10:00 am high to 11:00 am low back up to to 12:15 high to 1:00 pm low be one of those ab=cd moves or am I off on that? And if I am off can you give a quick explanation.
    On the switch to the SPY, whatever you do works for me, but out of curiosity, why does it matter? I know some of the stocks in the Dow are not adhering to the original criteria but if you are making money trading it what is the difference? Is there a more fundamental reason. Thanks.

  3. Corey Rosenbloom Says:

    Dominick,

    Gosh, there was more to talk about in today’s structure than I thought about in the summary post. We all see opportunities our own way which is why it’s so important to do our analysis and then discuss it with others if possible. Good call – I missed that both intraday and in the summary.

    Yes, it would have been an AB=CD. There was also another AB=CD from 12:00 – 1:00 and 2:00 to 3:00 but it was messy.

    If I decide to make the switch, I’ll explain why in a post. I’m looking for reader feedback as to whether they might prefer me to stick with the DIA or make the switch to SPY.

  4. chartsandcoffee Says:

    Today appeared to just be another down day but ask yourself “what was different about today?” http://chartsandcoffee.blogspot.com/2009/03/what-was-different-about-today.html

  5. Charlie Says:

    Hi Corey,

    I noticed at the very bottom of this post that you said you will be focusing more on SPY rather than the DIA? Does that mean that will reflect on your daily trades too or are you just focusing on the analysis of SPY on your blog?

    Great posts by the way!

  6. Corey Rosenbloom Says:

    Hey Charlie! Good to hear from you.

    It’s likely I will be shifting my personal trading away from the DIA and @YM which will be hard for me to do because I’m so accustomed over all this time with the numbers and functioning of the Dow.

    But the SPY and @ES has ten times the volume of the DIA and @YM and I believe the Dow Index has serious, irreconcilable problems due to six stocks falling under $10 in a price-weighted index.

    All the other professionals have already switched – I’m a dinosaur Dow hold-out. But I’d love to hear readers’ comments/thoughts as well.

  7. Reggie Perrin Says:

    SPY = clear choice

    we seem to be stuck at certain option strikes for the March expiry

  8. Anonymous Says:

    One thing you didn’t mention was volume. It might not be important but look at the long-legged doji that formed near the end of the day on the 8th and the closing tick on the 9th, both formed with huge spikes in volume but relatively little to no downward movement.

  9. Anonymous Says:

    Corey,

    You mention that the $1.00 gap down is just on the threshold of odds to fill. Can you explain that a little more?
    Thanks

  10. p Says:

    nice post corey

    structure is a keyword for me- quicker i can define a structure i can define a risk reward setup to trade. keep up the good posts.

  11. Charlie Says:

    Hey Corey,

    Yeah, I’ve been looking at the QQQQ but lately I’ve been concentrating on the SPY. It looks to have more volume and better recognizable patterns for me. Its also a broader index!

    I like the @ES product as well. It’ll be interesting to see your posts when you switch. When do you think you will switch?

  12. Corey Rosenbloom Says:

    Reggie,

    I think I may be converting my research and trading to the S&P 500 now. Should be interesting.

  13. Corey Rosenbloom Says:

    Anon,

    That would indicate churning, which is exactly what we got in the intraday pricing – that of seemingly erratic moves that really resulted in little to no net progress.

    It’s a sign of digestion and indecision and could lead to a decent counterswing up.

  14. Corey Rosenbloom Says:

    Anon,

    Research I’ve done on gap fills in the DIA show that it tests out best not to fade gaps greater than $1.00, which seems to be the threshold. Odds of a successful gap fill (trade) decrease as the size of the gap gets larger.

  15. Corey Rosenbloom Says:

    P,

    Thanks! We’re on the same page. The structure as it develops gives us clues on which trading strategies to use and how to find opportunities (and manage risk) during the day.

    The more we see it, the better we become.

  16. Corey Rosenbloom Says:

    Charlie,

    As much as I’ve tried to ‘get’ the NASDAQ, it’s just not for me. I’m more of an old-school Dow enthusiast who is now switching to the similar S&P index.

    The structure isn’t much different (in DIA and SPY) other than the SPY is 10x more liquid so it won’t be a difficult switch – it’s just be difficult to focus on new price levels and assumptions.

    Probably very soon.

  17. Joe Says:

    Corey, for your consideration.

    Please don’t change from DIA to SPY because I trade DIA. I concentrate only on DIA because I just started and your analysis really help me learn how to spot a pattern. I can see when I missed the pattern and what I did wrong when I read your blog after market close. After I found your blog, I felt like I begin to find some footing. Your analysis on DIA has contributed a lot to my learning curve.

    Thanks.

  18. Corey Rosenbloom Says:

    Joe,

    Thank you for reading and for your comment – I’m so happy to be of help.

    I’m still kicking ideas around and will try to be as effective to as many people as possible but it just seems the ‘industry drift’ is overwhelming to the S&P 500. I’m still exploring the options but I’ve been focusing on the Dow for over 10 years now so it will be so hard to switch but it may be essential.