Saturday, June 02, 2007

Dow intraday analysis (part 2)

Hmm, I was wrong, a bit :)

Dow did break out of the descending triangle on the downside around 1 pm, but as I mentioned, the volume when it broke out is not high. This means the selling pressure is not strong. I also mentioned that other technical indicators suggest that further downside is limited and upside is more probable. Immediately after breaking out, Dow tested the support turned resistance line around 13,640 twice (as shown by the white candle touching the line).

Dow succeeded on the 3rd try, breaking out of the resistance line with increased volume. It rose up to hit another resistance level, this time at 13,660 but couldn't break above it. If it cannot break above it, it will go below it. And so it did. It even broke down of the support line at around 13,640 again (notice that when it breaks below support line, the volume again did not increase).

Dow tested the support turned resistance line once and succeeded on the 2nd try. This time there's an increasing surge in volume that propels it all the way past the resistance level at 13,660. It finally closes +40 pts, another record high.

If I'm trading warrants intraday, there are a few trading opportunities found in this chart. I would opt for put warrants with strike price as close to 13,650 (ave price for Dow) as possible, with very close expiry. This is to increase the volatility of the warrants. Since I'm not going to hold beyond one day, it must be very volatile and closely related to the rise and fall of Dow, otherwise I might not be able to earn enough to sell at a profit. Put warrants as opposed to call because of the descending triangle formation, which is bearish in nature.

The best time to enter the put warrant is after 12 pm, when Dow test the support level. At this time, there will be 2 peaks to draw the descending top trendline and 2 troughs to draw a horizontal line to define the descending triangle. Of course, even before the triangle formation is defined, we can already expect it to form. Just waiting for 2 peaks and 2 troughs to confirm the formation only. The next instant Dow went up again (preferably as near the top trendline as possible) would be the entry point. I think close to 1220 something is a good pt to enter.

We wait for the break out on the downside to occur. Cut loss level would be if Dow went up higher than the top trendline, especially with increased volume, as that would mean the descending triangle formation is negated. That's why the entry position have to be as close to the top trendline as possible to increase the safety level.

When's a good time to sell? The best time to sell is not when it breaks down immediately (though on hindsight, for this chart it is). The best time is for it to test the support turned resistance and wait for it to drop BELOW the lowest point. It might take repeated tries. This is when other indicators can help to see if the breakout is genuine. If it did not drop below the lowest point, a downtrend is not established. If it can't drop, it will rise. Sell off if it didn't go below the lowest point.

In this chart, the best time is around 1 pm, after it tested resistance once and didn't fall lower. Looking at MACD and stochastics would also confirm that downside is quite limited at that point in time. Doing that would net you around 15 points. If the warrant is chosen correctly (the most volatile), it should be a net profit. Not really worth the risk, haha!

Maybe i'll do intraday for HSI too, long time never practise TA.