Gap, Flag And Divergence: A Day that Had it AllCorey Rosenbloomupdated Nov 10, 2008TweetAt GET.com we maintain complete editorial integrity on our content & provide transparent & unbiased information. Companies don't pay us to include their products although we receive a compensation when you successfully apply to products from our partners. See how we make money here.At GET.com we maintain complete editorial integrity.I know that today's (Monday) trading was frustrating for many reasons, but by the end of the day, we'd developed a successful gap-fade trade, a couple of bear flags, and a couple of positive momentum divergences - all of which are worth reviewing for educational purposes to build pattern recognition skills for the future.DIA 5-min chart:The day started with an overnight gap of roughly $2.00 in the DIA (DIA), which usually does not result in a successful fade trade, but today was the exception thanks to the rampant volatility that still remains in the marketplace. Price quickly moved down to fill the upside gap with only a minimal retracement before hitting its target (yesterday's close) and finding support there about the 50 period EMA.Price attempted a rally - which would be a good place to buy - but the rally was unexpectedly short-lived and found resistance via the falling 20 period EMA. At this point, a new price and momentum low were established as support was broken, hinting that lower prices were yet to come.By Noon, the key moving averages crossed over as price mounted a ‘flag' style 45 degree angle retracement up to confluence resistance, which held as price completed (and exceeded) a measured move down to further new price and momentum lows on the day.Finally, at 1:00, price mounted a swift though quite choppy counter-trend move up that penetrated both the 20 and 50 period EMAs, likely taking out any stops the short-sellers were trailing... just before moving swiftly lower into the 3:00 hour. Price actually set-up a bear flag, though generally I like to place stops just beyond the 50 period EMA which - in this case - were taken out. I like for flag set-ups to retrace no more than 50% of the prior impulse and find resistance (or support) at key moving averages.Those with strong stomachs survived the ‘rinse,' while those like me who tend to prefer tighter stops (though we know we shouldn't) were washed. I've since learned to re-enter trades that ‘nip' away my stop-losses and develop the courage to do this over time and multiple experiences. It takes practice.Anyway, as price trended to new lows on the day, the momentum oscillator failed to confirm these lows, setting up a positive momentum divergence that hinted at bearish weakness and the potential for short-term bullish strength. Bulls finished the day strong (relative to their previous performance on the day) and pushed price above the key moving averages and away from the day's lows.It was a semi-confusing day in practice, though a much clearer picture has emerged now that the price action has completed. The day serves as a great example of how a gap-fade, bear flag, and positive divergence interact to create possibile trades in the larger price structure.Editorial Disclosure: Any personal views and opinions expressed by the author in this article are the author's own and do not necessarily reflect the viewpoint of GET.com. The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone, not those of the companies mentioned, and have not been reviewed, approved or otherwise endorsed by any of these entities.