Wednesday, July 13, 2011

7-13-2011 Umbrella Pattern

Good evening traders,

Tonight I will review today's price action and introduce the umbrella pattern. I learned this pattern while studying with one of my mentors. The reason it is called the "umbrella pattern" is obvious when you view the picture. I drew in the cane part of the umbrella to make it easier to visualize. In this pattern price shoots up and then slowly drifts lower all day. The umbrella shape is formed by the EMA. This moving average is crucial on a 5 minute chart. You fill find that it often lines up with key areas of support and resistance, such as the volume weighted average price (VWAP). I never trade without it!

After breaking over the opening range and then the initial balance high, prices were capped by the 25-27 resistance area. That area coincides with the lows of July 6th. Around 1:15pm est prices had fallen to the VWAP and minor support at 1322.00 I took a small long here but bailed after we couldn't maintain the initial balance high of 1324.25. In the afternoon I tweeted:

"its after 2 pm est and we are below the initial balance hi, this makes me weary of taking any long trades"

The mid point held as support briefly but prices were held down by the VWAP acting as resistance. Once the mid point broke, it became evident that we would end the day toward the lower end of the range. On the chart I drew a lightening bolt where you can tell the umbrella pattern is in full effect. Once price has slipped below the ema and cannot rally above, its a sure sign that a downtrend has emerged. The cumulative delta breaking down and a weak stochastic reading added more conviction to the short side. After the breakdown of the day's lows price had a nearly perfect extension to the 23.6% Fibonacci level. 1310's were also a low value area on the micro composite, a swing low from yesterday evening, and there was a gap fill at 1310.75.

In after hours trade, news of Moody's reviewing US debt ratings dragged the market down to 1302. So far this decline has been very orderly with average selling volume on the way down. I am still expecting a test of the 1290's before further upside. This will of course depend upon the geo-political climate. Things are getting hot this summer and there is a lot of news for the market to react to. I will continue to monitor headlines out of the White house, Libya, European Union finance ministers, and blue chips 2nd quarter earnings. Make note of the umbrella pattern, I can guarantee you will see it again in the future. Just like in nature and architecture, The arch is also a pivotal figure in the stock market.

Thank you for reading. Good luck and good trading,


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