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An Intraday Dow Diamond

01/27/06 07:41:27 AM
by David Penn

January came in like a lion. Does an intraday reversal pattern anticipate that January will go out like a lion as well?

Security:   YMH6
Position:   N/A

I've found myself writing about consolidations lately (most recently, "Caterpillar's Diamond Breakout," Advantage; January 26, 2006), which is a testament to the condition the markets have found themselves in since the opening week of January sent stocks on a tear to the upside.

FIGURE 1: MARCH EMINI DOW FUTURES, FIVE-MINUTE. Technical indicators can help traders anticipate breakouts from otherwise directionless consolidation patterns. Note how a running positive divergence in the stochastic suggested that the breakout from the diamond consolidation of January 26 would be upward. Appropriately enough, volume expanded on the breakout as well.
Graphic provided by: eSignal.
In the article about Caterpillar's diamond, I pointed out how a negative stochastic divergence within the pattern hinted that the break from the pattern was likely to be downward. What was important, though, was the fact that although there was a negative stochastic divergence that set up the trade, the necessary follow-through to the downside was completely absent. I should add that sometimes when signals in one direction prove unfulfilled, it is a "heads-up" alert that the market might move in the opposite direction — that is to say, a negative divergence that goes unfulfilled or unconfirmed with downside follow-through is often a bullish development.

That was not the case here with the intraday diamond in the March emini Dow futures (YMH6) the morning of January 26. As Figure 1 shows, there was a running positive stochastic divergence that began with the stochastic low around 4:30 am Pacific time. As the YMH6 chopped forward with a downward bias, the stochastic continued to make higher lows — near 6:30 am and then again around 7:00 am. That higher low in the stochastic at 7:00 am came just as YMH6 was making still yet another lower low. And it was that low that would serve as the launching pad for the market's sharp, sudden move higher in the eight and nine o'clock hours.

The measurement rule for diamonds takes the size of the pattern at its widest point, and adds that amount to the value at the breakout level. In this case, a pattern size of 33 is added to a breakout level value at about 10790 for a minimum upside projection of 10823. This minimum upside was reached a little over 15 minutes after the breakout. The March emini Dow actually continued higher by half as much, tacking on an additional 20-odd points before topping with a shooting star candlestick and rolling over and down. Interestingly, as sharp as the post-breakout, post-minimum price objective correction was, that correction stopped and found support at the exact same level as the breakout — 10790 to the penny.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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Date: 01/28/06Rank: 2Comment: 
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