Well at Least Half of the Day Made Sense

Jan 22, 2009: 10:55 PM CST

I thought I’d give one of my intraday posts a catchy title.  Let’s get some insights from the intraday action and develop our experience in price behavior as we look at the intraday DIA action for January 22, 2009.

DIA 5-min chart:

The market began the day with a large-scale (over $1.00) downside gap which made a quick attempt to fill but was met swiftly with resistance at the falling 20 EMA.  Price went to new lows on the day and then formed a near-perfect “Falling Three Methods” Candle Pattern (could also be called a type of bear flag or measured move) into Confluence Resistance at a zone I call the “Cradle Trade.”  This was your highest probably short so far.

Price fell from that level down to new intraday lows before swinging back twice to form two mini-bear flags – one of which (11:30am) formed into the falling 20 EMA which was a high probability, low-risk short-entry.  As advertised, price fell to new lows on the day.  It was around this time that you should have been thinking we were experiencing a Trend Day and casually looked past the positive momentum divergence.

Price then swung back into the confluence of the 20 and 50 EMA, setting up a short-sell continuation trade… only to be stopped out as price surged into the 2:00pm hour.

Looking in hindsight closer at the structure, we see price rose to find itself trapped in a consolidation pattern locked between the falling 50 and rising 20 EMAs – a perilous ‘no-man’s-land’ zone.  It’s actually higher probability to place a bracket order both ways once you recognize a price consolidation as that and join the winning side… letting the market prove itself.

In reflection, we then set-up a “Cradle Trade” to the upside as price supported (with a gravestone doji) at the confluence of the 20 and 50 EMA just before the strong bar that catapulted us to new intraday highs, much to the confusion of the sellers on the day.

We made a new intraday price and momentum high, which suggested that higher prices were yet to come.  One should have been looking to ‘buy the first pullback’ into support, which occurred like clockwork where I put the final green arrow… only that trade was stopped out as well as we crested into a deeper than expected retracement.  From an Elliott Wave fractal perspective, we could have counted waves 1, 2, and 3 from the 12:00pm lows with 2:00pm being the crest of wave 3.  Under this count – which I had at the time – we would expect the Wave 4 correction (which came) to support above Wave 1’s peak, which it did (though it entered the price territory slightly, causing confusion to the Count).

That retracement was a little deeper and threw some traders off their game.

We actually did get a final 5th wave up into the close, which most likely would have hit new highs or at least tested the intraday high if we had 30 more minutes to trade.  But alas, we take what we get.

So in sum, the morning worked quite well with classic, price structure techniques and the trade set-ups I use, but the afternoon was quite a bit more volatile and less respective to these methods as I like.  That’s why we use stops and money management – it’s about edge over time, and taking positions we suspect to have ‘edge’ from a risk-reward standpoint.

As always, take a moment to look back over the day’s activity to glean additional insights.

Corey Rosenbloom
Afraid to Trade.com

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5 Comments

5 Responses to “Well at Least Half of the Day Made Sense”

  1. Anonymous Says:

    Whipsaw best which I watched in amusement untill I finally nailed it as a triangle by which time it was nearly over. Weird wave 2..

  2. Manju Shekhar Says:

    Corey,
    I got whipsawed too, today! I woke up an hour late, and watching the Dow futures, I figured this could develop into a trend day and entered short around 12.30 just below the little doji, left of the big white candle. Of course got ejected right away. Luckily I didn’t take any more trades, as the price action just got too confusing for me.

  3. planetelex Says:

    Nice Analysis – thanks Corey

  4. Corey Rosenbloom Says:

    Anon, ‘weird’ is a good way to describe the price behavior of the whole week. Price is just so jumpy.

  5. Corey Rosenbloom Says:

    Manju,

    That was the proper play you did but we can’t control the outcome of our trades. From an edge standpoint, shorting a rally into resistance on a day with a large, unfilled gap is a very high reward, low risk opportunity. Over time, it produces profit but the outcome of a particular trade – or even series of trades – is never guaranteed.