Stock Trading: Rounded Reversal Structure Underway

Today’s US equity index markets completed a classic “Rounded Reversal Day” pattern worth examining.  Let’s see this pattern and also view the “optimal entry point” that confirmed that this structure was likely forming.

DIA (DIA) 5-min intraday (incomplete) chart (courtesy TradeStation):

The day opened with a downside gap that quickly filled (or actually came just shy of filling) and then price began moving lower on the day after forming two ’shooting star’ type candle patterns (indicative of potential bearish reversals near resistance via yesterday’s close).

Price then moved to the confluence of the 50 period EMA and the “Daily Pivot” price (the horizontal dotted line - simple pivot point analysis).    After making an attempt to support here just beneath $86.00, price eventually broke to new lows but did so on a clear positive momentum divergence (around 11:15am).

It’s surprising to me (or perhaps it shouldn’t be) how many intraday lows (or highs) are formed with some sort of momentum oscillator divergences, and today was no exception - provided price does not plunge in the last trading hour (UPDATE … which, quite shockingly, is exactly what happened).

Price then broke above both the 20 and 50 period EMA after the divergence, signalling potential bullish strength, or at a minimum the need to ‘cover short positions’ at that time.

Price completed the next down-swing to form a higher low in price and subsequently the momentum oscillator as well, hinting at possible ‘hidden’ bullish strength building.

The next up-swing was powerful, taking price once again above the flat EMAs and making a new swing high and officially reversing the day’s trend from down to up (after having made a higher low and then taken out the prior swing high).

I labeled the $86.00 ‘hammer’ candle at confluence support AFTER price etched out a freshly confirmed up-trend as being the “highest probability entry” because the structure now favored higher prices yet to come.  Also, should price have broken down beneath those levels, a tight stop could (or should) have been used to limit losses were the price to reverse back to the downside, giving you a low-risk, high reward opportunity.

As price held support, the odds for completing a “Rounded Reversal” Day were highest and that is what price achieved, forming a sort of ’saucer’ bottom or as I like to call it, a “Rounded Reversal” pattern. Let’s see how this day plays out but for now, today’s action so far gives you a near perfect example of the “Rounded Reversal” Pattern.

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