Idealized Trade: Intraday Elliott Wave And Flags In SPY

I wanted to point out a 5-wave Elliott structure and two bull flags that offered trading opportunities in today’s (April 21, 2009) intraday SPY (SPY) structure.

We started the day with a medium overnight gap which was quickly filled (small to medium gaps have greater odds of filling than large gaps), so that should have been the initial trade.  Once a gap fills, often the second trade is a move back down to test the lows off the open, and an evening star which formed into confluence resistance (yesterday’s close and the 20 EMA) set-up the second (short) trade of the day.

Those proficient in pattern recognition saw the ominous converging trendlines and narrow candles (dojis) of a falling wedge (which is bullish), and the trade entry came when price surged with a bullish candle out of the wedge.  This could also have been treated like a bull flag, which targeted the 50 EMA, though price surged well-beyond these targets.

Since price surged up in a strong move to new highs (price and momentum) on the day, it was a sign to experienced Elliott Wave traders that we could be experiencing a “third wave” which indeed turned out to be the case.  Remember, first and second waves are difficult to identify - you almost have to see them in the hindsight of a powerful 3rd wave.  Only then can you prepare yourself to buy after Wave 4 is complete.

Within the 3rd wave, a “Three Push” reversal pattern (triple swing negative momentum divergence) formed which led to the 4th Wave pullback into EMA support.

At the bottom of Wave 4, a doji formed (which is often a reversal signal) which was followed by a bullish breakout that began your “Wave 5″ Trade.

A unique opportunity arose - that of a Bull Flag within Wave 5.  Look closely as price formed a clean retracement to the rising 20 EMA which set-up the Bull Flag “Measured Move” trade.  Price actually exceeded the price projection into new highs on the day, though the new highs formed on a slight negative TICK divergence (not shown).

Remember, 5th waves are expected to have a 5-wave subdivision, and you can count that into the day’s close (which set-up scalp trades in the structure for very aggressive traders, particularly on the one-minute chart).

The more you see these patterns, the better you’ll be able to recognize then trade them in real time - that’s why I find “Idealized Trade Journals” and visual charting of your own patterns to be very valuable in your development as a trader.

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