Am I using IR2104 correctly?
As Mario states, you must use a large enough capacitor.  I generally use a 1uF to 4.7uF 0805 ceramic capacitor for this bootstrap capacitor.
Check your diode polarity.  It is correct in the schematic, but it is one of the easiest things to mess up in this circuit.
Additionally, you MUST continually 'toggle' the capacitor, meaning that the lower MOSFET MUST be periodically turned on in order to refresh the charge across the bootstrap cap.  If you leave the upper MOSFET on for too long, the capacitor voltage will begin to droop and your FET will move into the linear region.  Try driving with a square wave of at least 20kHz.