A Quick Look at Tuesday’s Trend Day

Aug 5, 2008: 7:56 PM CST

The Fed decision and declining oil prices gave us yet another major trend day in the indexes that was more in-line with textbook definitions.  What do I mean?  Let’s look at the charts.

August 5th – DIA 5-minute chart:

Generally, two events precede a trend day:

1.  Range contraction or some sort of narrow candle pattern (such as a doji or a spinning top) the previous day.

2.  A large (relative) opening gap that doesn’t come close to filling

These two events preceded today’s action.  Yesterday’s range formed a type of ‘spinning top’ where the close and open were close to each other, despite range expansion above and below these zones.  These – along with doji patterns – indicate that a market may be coming into balance and that range expansion may be ahead.

The morning’s opening gap on such a large day as a “Fed Day” was all the clues you needed to trade as if a trend day was unfolding, and it indeed did.  During a trend day, you should place a core trade immediately upon realizing odds strongly favor a ‘trend day’ move (such that the market will open at the lows and close at the highs – as such, any trade location will be favorable).

You should trail a stop below the rising 50 period EMA (on the 5-minute chart) and then try to play for swings or scalps as price tests the rising 20 period EMA, perhaps on margin if you are experienced in trading these days.

The day’s action was a textbook trend day, with price only ‘nipping’ beneath the 20 period EMA once – when the announcement was released which almost always results in wild, seemingly random price swings in both directions before an eventual direction is established.

Price formed a clean bull flag into the close, and the final retracement to the 20 period EMA set-up this classic and also text-book bull flag which was good for a potential $0.50 (50 points) of profit.

Study today’s action for further insights from confirming indicators such as volume, breadth, TICK, TRIN, etc for a deeper experience of the day’s action and how it relates to possible trade opportunities.

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