Intraday Divergences Preceding Reversal

Today’s (Tuesday) DIA (DIA) action featured a lengthy positive momentum divergence heading into the morning’s open which wound up being a valid pattern that gave ample warning of its developing structure.  Let’s view it both on the 15 and 5 minute intraday charts.

DIA 15-min:

A quick take at the structure shows a “Three Push” pattern completed on Friday which preceded the large spike-up into EMA resistance which failed to garner further upside, as the indexes broke to new lows.  Good example there.

We had a failed bear flag yesterday (in that it did not meet its measured move downside target) though price formed a positive momentum divergence going into this morning’s open which preceded the price reversal (counter-swing) back to the upside.

Notice that the end-of-day volume was a little lackluster, and could be a non-confirmation of today’s rally.

DIA 5-min:

The 5-minute timeframe offered interesting opportunities today.

We began the day with a gap-fade (price gapped then ran into EMA resistance, setting up an excellent short-sale trade back to yesterday’s close) which got its target literally to the penny before finding support (on a triple swing positive momentum divergence, just after a “Three Push” pattern completed into yesterday’s close).  The doji (dragonfly) at support offered perhaps the best trading opportunity of the day, second only to the Cradle (confluence) Buy just after 1:00 EST.

Price rose to an intraday high at 11:00am, forming a new momentum high which suggested that perhaps an actual high was yet to come - keep in mind the structure was still officially in a downtrend, though the structure was shifting at this point.

Price formed a bit of a flag-style retracement down beneath the EMAs (the 20 did not cross above the 50 at this time so the structure was still bearish and price was still in a downtrend) though when price broke above the resistance line, it also broke back above the 20 & 50 EMAs and pulled back to confluence support (The “Cradle Trade” as I so call it) which set-up a very high probability trade (with a stop just below the prior swing low at $71.40).

As you can see, others caught on to this trade idea (or at least demand overcame supply at this critical area… perhaps in part from shorts covering) and we had a massive rally to the upside which, as we took out the 11:00am swing high, officially reversed the trend of the 5-min chart to up.

The next high probability trade set-up came as we retraced back to the rising 20 EMA at 3:00, forming a type of bull flag (that fell just shy of its target).

Now, we have a new price high on a negative momentum divergence, and a weaker than expected volume reading (volume is supposed to increase at the end of the day due to the “Volume Smile” effect).  This, along with the negative divergence, is a technical non-confirmation in development.  Let’s see if it plays out.

There were lots of interesting things to take away from today’s trading session.  Annotate your own chart in your own style to see what else you can find.

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