Tuesday Intraday Index Fun

May 6, 2008: 5:58 PM CST

Wow!  What an interesting day it was for active traders.  Yet another gap was filled and a sort of unexpected trend day emerged.  Let’s look!

Dow Jones ETF (DIA) 5-minutes

Today opened with a sharp intraday gap down, which spent the first 10 minutes continuing downward.  I prefer to wait for 3 bars (15 minutes) before entering a gap-fade trade and I have increased confidence of a fill when the gap is less than $1.00 (100 Dow points).  Today’s gap was just over $0.50.

I typically place a stop 1/2 the distance to my target, which is always yesterday’s closing price.  As I showed earlier today, the odds favor a gap fill, but the odds of filling decrease along with the size of the gap.

Nevertheless, this is always the first trade to place with a decent gap-fill fade trade.  The trade achieved its target with only a small pullback just after 11:00am.  It would have been fine to exit the trade at a 50% retracement, which corresponded with the falling 50 period moving average (or at least take ‘half off the table’).

Strong-willed traders held on for the full fill, which typically produces a powerful retracement (or reversal) back IN the direction of the gap.  When this doesn’t happen, it often signals a more powerful trade (or signal) in the opposite direction, which was the case today.

Price supported at yesterday’s close (purple spotted line) and then rose to form a momentum divergence which then pulled back again to yesterday’s close and the rising 50 period moving average.

If you expected a trend day based on the price action up to this point, this would have been an ideal point to add to a core trade or go on leverage with a high-probability scalp trade.  Price gave you this scalp before faltering and closing near (or just on) the highs of the day.

Bears were strongly discouraged today as bulls claimed yet another victory.  The market is clearly climbing the proverbial “Wall of Worry.”

For reference, here is the action on the S&P 500 ETF – SPY.

As I always recommend, print out the daily action and locate the key trades you feel provided excellent opportunities via your understanding of price action and market structure.  Annotate the chart by hand to get a better feel of price action and incorporate these patterns into your experience so you can recognize them better in real time.

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