Saturday, February 9, 2013

Friday's /tf

What we see here is a classic pattern. 

What we know is:

1) IWM is in an uptrend. It closed above the 10 day MA on the daily chart.  This is as bullish as it gets.  We must keep context in mind.  This market is strong.

2) On this intraday chart -  5 min  candles -- we zoom in on overnight action. The range is very tight.  One white dragonfly candle at 5 am shows a drop was quickly rejected.

3) At 8:30 - we see momentary weakness and the market appears to breakdown, moving below the bullish dragonfly candle at 5 am.  But again, keeping higher timeframe in mind, this is going against trend so we watch carefully and sure enough, the market reverses and moves to the top of the developing TL.

4) At 8:40 - the TL breaks and here is an ideal opportunity to get long.  All the sellers in the overnight session and shorts are starting to realize this pattern is broken and will need to reverse.  This formation is several hours long -- plenty of fuel to create a strong actionable move. 

5) /tf explodes from the breakout. We quickly look for the next clear resistance area -- the highs from yesterday.  Indeed, /tf pushes all the way through -- taking out stops.  This occurs on the highest vol. candle of the day so far -- a sure sign of exhaustion.  Sure enough, /tf reverses and moves sideways for over an hour.

6)  The same exact trade repeats - with a breakout of the flag pattern, spurring new short covering.  This move is now at all time highs so it's difficult to gauge how far it can run.  It's still over 20 ticks and finally hits highs for the day.

Remember to know context, key support /resistance areas, volume exhaustion to indicate a move may be over... and the length of time of the consolidation pattern. 

I think this chart is clearer and I'm not sure moving averages are helpful for me anymore.

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