Thursday’s price action gave us yet another excellent example of a trend day, which offers us the opportunity to trade any retracement aggressively. Let’s look at the structure and key high probability trade set-ups that formed.
DIA 5-min:
The day started just as Wednesday did with a large (greater than $1.00) overnight gap. For the 100th time, it is generally not a good idea to try to fade a DIA gap greater than $1.00 as today’s (and yesterday’s) structure shows.
In such a situation, you should be waiting to sell the first pullback into key resistance for your first major trade of the day. That occurred around 11:00am as price pulled back to confluence resistance via the falling 20 and 50 EMAs.
Price then went to new lows into noon and formed a Bear Flag into confluence resistance at the 20 EMA and 200 SMA - I labeled this the Highest Probability (or Best Setup) of the Day. Note the risk-reward inherent in this trade. If you expected a flag here (as it unfolded), you had a very tight stop (just above the confluence zone) to target a Measured Move of the prior swing from $82.80 to $82.20 (roughly $0.60) which unfolded perfectly as price moved to new lows on the day at 1:00 - this was also your exit as the measured move target was complete.
Price then staggered on the day’s lows and made one more flag-like retracement to the 50 EMA which set up another opportunity to enter short to target a test of the intraday lows. The next swing took price down to new lows as the market closed very close to the absolute lows on the day - a bearish development that erased all the gains of yesterday’s bullish action.
If we break lower tomorrow, it will likely set-up yet another Bull Trap, meaning we would be almost certain to test our November lows. Study the price action for more clues and use today’s example as a great reference for how an ideal trend day should unfold.
Corey Rosenbloom
Afraid to Trade.com
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