DIA: Inside Monday’s Interesting But Frustrating Trading

What a battle we have going on between relentless bulls and emboldened bears - the struggle of which was evident in the push-pull ‘go nowhere’ intraday trading action seen on the broader US Equity Indexes and ETFs.  Let’s look as usual under the hood at the 5-min DIA (DIA) action to see the footprints of this battle and note key trade set-ups - most of which were ineffective - for the day.

DIA 5-min chart:

Let me preface by saying I had a crummy trading day as it seemed none of my basket of set-ups or price structure plays (low risk, high probability) seemed to work at all.  I’ll describe the logical thinking and why it failed today.  Remember, you can’t win ‘em all.

The morning opened with an overnight downside gap, which the first instinct is to “fade” the gap.  Luckily, I had bearish expectations going into today so the gap wasn’t a surprise, but the gap also didn’t fill as expected, which resulted in perhaps a quick stop-loss taken for those trying to fill the gap.

To make matters more frustrating, the gap filled.  Monday will go down officially as a “filled gap” day (which reminds me - I need to do the statistics for December and for 2008).

So really the only trade set-up that ‘worked’ (that I use in my basket of trades) was the two long-upper shadowed doji/shooting stars that formed at the gap-fill zone and resistance created by yesterday’s closing price.  Generally, I target the day’s swing low for a price goal, which would have been $89.10, combined with my bearishness on the day, yet the target was not achieved.  You could have taken a partial profit on the trade… though it also ultimately reached its goal… just not in a timely manner.

If you look very closely just before noon, you see a gravestone doji at the 20 EMA resistance which also formed a classic Bear Flag… which also fell just shy of its target… though it achieved it later (the theme of the day).

Price then found support about $89.50, formed a small double-bottom on a positive momentum divergence, and put in a bullish hammer reversal candle which provided the second ‘working’ trade of the day.  Price exceeded its target and found resistance once again at yesterday’s close.

We formed a bearish engulfing candle which preceded the large swing down through EMA support (notice how the EMAs never seemed to contain price as support or resistance - price tends not to respect EMAs at all in a flat, range-bound environment such as today… oscillators tend to work best here).

Price then plunged down to new lows yet found support at the rising 200 period SMA, forming a doji reversal candle and two other long-legged lower shadows at support.  Price then rallied up to find resistance at the 50 EMA, formed a shooting star reversal candle… yet immediately invalidated that signal to close on an upswing.

I guess the theme of the day - as I hinted earlier - was that price formed classic trade set-ups yet violated them… then achieved the original target.  For me at least, it was a frustrating day, but again, these patterns tend to work more times than they don’t, and when they don’t work, you lose less than you win when they do ‘work,’ thus creating the foundation of “Edge” in a consistent trading system.

Let’s pull the perspective back quickly to the 30-minute chart to see perhaps why price found ‘magical’ support at the $89.40 level.

DIA 30-min chart:

Without going into too much detail, notice how price hugged the rising 20 period EMA all day on the 30-minute chart until price broke it just before the close… only to rally back above it, whipsawing the bears and knocking out long stop-losses.

What do you expect - the last 3 trading days were almost perfect trend days.  Due to the price alternation principle, a bit of consolidation was expected and it came on cue.

Continue studying the intraday charts for additional clues to price behavior so that you’ll be a better trader when these patterns occur in real time.

Posted in Categories: Contributor, External Research, Stocks, USA.

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Comment by Larry A. Magliocca

2009-01-06 12:56:43

Thanks, Corey, for sharing your trading frustrations from yesterday.

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