We expected a price movement out of the recent coil (consolidation) and we got it today in spades.  The break was to the upside which surprised many bears, but let’s look inside the DIA’s 5-minute chart to gather where we might have entered some high probability trades and learn from the day’s structure.

DIA 5-min Trend Day:

The day started with a large-scale (greater than $1.00) upside gap that was began and was discussed last night in the post-market hours.  Statistics show that it’s not best to try and fade a gap greater than $1.00 in the DIA (100 Dow Points).  Price made a partial move into the gap but fell short of testing the rising 20 EMA.

Remember that in gaps, we generally have to turn off our classic indicators until they ’shake out’ the gap price from their periods – they really become useless until you do so.  Price made a new momentum high, but gaps themselves serve as momentum impulses.

Price carried back up to find resistance and then consolidated as it hugged the rising 20 EMA as traders waited patiently for the announcement of any Fed policy.  Today’s intraday action represents an idealized structure of what to expect on Fed Days.

Price has an initial morning gap, consolidates through the afternoon, then makes three sharp swings on greatly increased volume after the decision is given.

Price formed a major Bollinger Band Squeeze into 1:00pm (which meant place bracket entry orders outside this range) and then burst into a quick 5-wave push to new highs on a negative momentum divergence.  Alternately, one could call this the “Three Push” pattern which is also a reversal-style pattern.

We had a downswing that perhaps ’should’ have found resistance at the confluence of the 20 and 50 EMA, but alas it did not and the ‘double dip’ beneath the 50 likely stole away some well-placed stop-losses.

It’s often a battle over where to place your stops – if they’re too tight, you’ll almost always be stopped out unnecessarily but if they’re too far away, though you’ll be stopped out less, you’ll also suffer larger losses when they occur.

Today’s action was a testament to the “Further Stops” crowd, as price breached these averages then made a run to try to test new highs which was cut short by the Closing Bell.

Let’s see if Bulls can consolidate these gains and hold the breakout they managed to achieve today.

Corey Rosenbloom
Afraid to Trade.com

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