Both Tuesday and Wednesday had their best moves start right at the open, and since I’m not fond of entering at the open without a clear setup, I would have had trouble trading them. I’m not trading this week, but that doesn’t stop me from trying to figure out the charts.

It's All In The Angle

On today’s 15 minute chart I’ve marked two patterns, one as a flag, and the other tentatively labeled a WEDGE. Whether you like trading patterns or not, there is some useful information in the angle of the congestion that followed the opening moves yesterday and today.

The flag sets a nice example. Perhaps you’ve heard the saying “the flag flies at half mast.” Points #1 to #2 represent the flag pole or “mast”, and points #2 to #3 are the flag. After the breakout above the flag, the next stop is at #4, repeating the distance of the original flagpole. It’s really just another example of a Measured Move.

The key is that a good flag will either be flat, or more often will lean against the trend set by the flagpole. In other words, it will create a pullback.

But look what is happening from points #5 to #6. The correction is leaning the wrong way. That is more likely to be a wedge formation, although with the low volume this week I’m not completely happy calling it that. But I wouldn’t be surprised to see a pullback here, even if the Santa Claus rally is going to continue.

If this is a wedge, it won’t be confirmed until the lower trendline is broken (although I know traders that will enter on the reversal of that “false” breakout at point #6.) And even then, the target would only be the level of point #5, which isn’t much room for profit.

Whether this actually works as a wedge or not isn’t the issue. In the short term, corrective action that struggles in the direction of the trend can show the market is losing momentum and is often a sign of weakness. But during low volume holiday periods anything can happen, so just trade what you see.

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