A Perfect Trend Day Example

Nov 6, 2008: 4:36 PM CST

As depressing for the bulls as today’s equity index price action was, it allowed us to witness a near-perfect “trend day down” example.  Let’s at least learn a lesson from today.

Dow Jones 5-minute chart:

Where do I start?  First, the day began rather quietly, with price being beneath all key moving averages on the 5-min chart, and the averages themselves being in the ‘most bearish orientation possible,’ combined with an expectation of a continuation of the downswing in progress on the daily chart.  Price opened flat, contined its downtrend, and with the exception of one hour, continued to move steadily and comfortably (creeping) lower all day long.

Interestingly enough, a lenghty, multi-swing positive momentum divergence set-up all day long, but all we got (in terms of a retracement) was an hour long, miniture bull flag that I’ve highlighted for you.  Notice also how the 50 period EMA contained price to the penny when tested – that is the hallmark of a true trend day.  Also, it’s best to throw away, or delete all indicators from your charts and focus exclusively on moving average analysis, combined perhaps with the TICK, TRIN, volume, breadth, or whatever you prefer that is NOT a derivitive of price (especially in the oscillator sense).

The rule is the following:  Once you realize we have a trend day in force (which you might not realize until 10:30 or perhaps even later), establish a core position in the direction of the trend and play to the end of the day (exit on close) while trailing a stop using the 50 period EMA.  IF you are correct and it is a trend day, your initial trade entry will be irrelevent because price is expected to close on the lows or highs of the day.

With that being said, you can trade on leverage (if so inclined) when price retraces to the 20 period EMA – provided it ever does so – again with a stop just beyond the 50 EMA.  These will be scalps only in the direction of the trend and usually you’re targeting the most recent swing low or just beyond it.

So annotate the chart using your own analysis and print out today’s action for further insights.

1 Comment

One Response to “A Perfect Trend Day Example”

  1. Kevin Says:

    Hi Corey,

    On trend days I throw away all my indicators and simply use the fib retracemetns. I try to stay with my position into the close with a protective stop right above (if short) the .618 retracement of the day’s range. This seems to work well on trending days.