DIA - A Little Elliott Wave Into The Close

Just when you thought the trading day couldn’t get any weirder… price gaps down strongly (and likely unexpectedly) in the morning, forms a trend day virtually all trading day long, and then destroys the trend-day down structure into the close.  Let’s look at the intraday 5-minute structure and the sneaky Elliott Wave pattern that formed into the close.

Let’s use the DIA (DIA) - Dow Jones ETF - for a trading proxy:

5-minute chart showing the busted “Trend Day” structure:

Up until 3:00pm, Monday’s action was a classic example of a “Trend Day” trading tactic environment.  We opened with a large gap with nary an attempt to fill it, quickly made new lows on the day, and subsequent rallies to the falling 20 period EMA all failed, offering opportune short-selling entries (with a stop-loss just beyond the average).  The down-trend structure was also confirmed by the falling 50 period EMA.

It was a day to trade aggressively short - if you had the stomach for it.  However, as has been written by TraderMike and many others, short-selling in a bear market isn’t as easy as you think.  It’s not as easy as “throw a dart, get short, rake in profits.”  Notice that the end-of-day rally didn’t hold resistance at either the 20 or 50 period EMA, and in fact, virtually erased all gains if you got short at any point in the day and held until the close.

A positive momentum divergence preceded the late-day surge, and with conditions so oversold, it certainly shouldn’t have been entirely unexpected, but the rally was quick, unrelenting (to shorts), and persistent, rallying roughly $4.00 (400 Dow Points) before the closing bell sounded.

On an educational note (including higher/lower time frames), the 10:30 rally into the falling 20 period EMA - setting up a powerful short-sell entry - was actually a complete Elliott Wave pattern I pointed out this morning in my “One Minute Elliott Wave Example” post on Monday morning.

The final rally was also a five-wave Elliott Pattern, where the first, third, and fifth waves all contained fractal impulse 5-wave patterns as well - it’s clearly worth examining from an educational (example) standpoint.

1-minute chart showing Elliott Fractal Wave into the Close:

Elliott Wave is fractal, and ‘waves within waves’ are often labeled with Roman numerals (as well as parentheses or circles - not used in this example by me).  The larger Arabic numerals (1-5) represent the large-scale Elliott Impulse while each of the 1, 3, and 5 Waves are subdivided with Roman (i - v) numerals.

Notice that in both sub-wave 5 (of Wave 3) and sub-wave 5 (of Wave 5) both ended with negative momentum divergences.  I’m finding higher probability plays when I identify potential Elliott 5-Wave completed patterns that form negative momentum divergences - there’s higher probabilty than just saying “Oh, look - a negative divergence” when you apply a perceived (potential) Elliott Wave count.

Also, sub-waves ii and iv (of Wave 3) found support at the rising 20 period EMA.  Again, applying a potential Elliott count may grant higher probability than simply saying “it’s a pull-back to a moving average” as I’m so accustomed to doing - it’s taking time for me to incorporate Elliott but I’m finding it fascinating and an excellent complement to the work and trading I’m doing already.

Even though this Wave pattern is drawn on the 1-minute chart (I don’t recommend trading this time-frame), notice that the impulse crossed a large price territory, from roughly $95.25 up to $100.25 (a $5.00 swing) in just over an hour - folks, that’s remarkable.

Monday’s trading activity will yet again go down in the history books.  At one point, the Dow Jones (^DJI) was down 800 points in a single day.  The Volatility Index VIX (^VIX) made new highs at index value 58.24.  Many stocks made new lows.

Stay very safe in this environment - it’s not the place for quick wealth generation.  More fortunes are being destroyed in this environment than are being created.  Use extreme caution and continue to make capital preservation your #1 goal.

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

Subscribe by RSS Subscribe by Email