A Trend Day that Teetered in the Balance and other Signals
Tuesday’s action provided yet another fascinating example of classic trade set-ups and low-risk, high probability opportunities in the intraday DIA chart. Let’s see this “Trend day that almost wasn’t” and also look at a bull flag, Bollinger Band Squeeze-Play, and a successfully filled morning gap (I should have titled this post, “The Day that Had it All.”)
DIA 5-min chart for December 30, 2008:
Starting at the beginning, we had an overnight gap-up that was quickly filled, complete with upper-shadow bearish candles that preceded the retracement. Price then pulled back sharply to a major ‘confluence support zone’ formed by yesterday’s close (the target for the gap-fill… where shorts would be covering) and the rising 20 period EMA. A bullish hammer candle formed which was followed by a narrow-range doji before price preceded into a fresh impulse move into new highs… albeit on a negative momentum divergence.
Oh, the retracement off the morning highs also came off a New Momentum High (NMH) which set-up the “Impulse Buy” trade I discuss frequently.
Price then formed three doji (consolidation) candles before retracing comfortably back to the rising 20 period EMA, forming parallel trendlines which set-up a possible Bull Flag trade… which met and exceeded its “Measured Move” target into fresh intraday highs (and the top of the Bollinger Band… on another negative momentum divergence). I found the morning price action so interesting that I broke character and posted an intraday analysis before the day was half over!
It was at this time that I called the price action to be most likely a Trend-Day and suggested that any retracements be bought. The “line in the sand” to determine whether or not a day will unfold as a pure trend day is the rising 50 period EMA, which – if tested – is expected to act as strong support. Failure to hold the “50” would call the trend day theory into question, and two closes beneath the 50 would – in my book – officially invalidate the trend day, triggering stops (though some prefer to trigger stops at one bar beneath the EMA, or if price breaches the 50 at any point).
I don’t prefer those strategies – though I used to employ them – and today’s price action explains why. In the current environment, price swings tend not to ‘respect’ classic (or expected) boundaries comfortably (or as ‘nicely’ as they have in the past) which means our stops and turning points (in our analysis) must be wider to accommodate for this change in volatility.
That being said, traders who realized this and capitalized on it were able to hold on to their positions, albeit literally by a hair, and play for the full potential if the trend reaffirmed itself, which it ultimately did around 3:30. Traders who played ‘conservatively’ (as I am accustomed to do – erroneously) and utilized ‘tight stop’ strategies missed the end-of-day move completely.
Foregoing this whole “tight stop vs loose stop” debate, price formed its final trade set-up of the day, which was a breakout from consolidation play (rectangle pattern) or more specifically a breakout from a “Bollinger Band Squeeze” play which satisfied its target nicely (exit at close of day).
Take a moment to go over today’s market action and highlight your own patterns and build experience while the market is closed so that you can internalize these patterns and react better when the market is open.
Corey Rosenbloom
Afraid to Trade.com
Thanks Corey , great post !
I replied to your earlier message on the prior post…I don’t know what’s gotten into me lately, but I’ve been commenting more on the sites I follow. Couple things:
1) Have you ever posted a picture of your trading station? I (among others) am fascinated to see people’s work space since I’m in the process of upgrading my computer + monitors.
2) You have great annotation on your charts from stockcharts, but do you only use them for the blog. I think I read somewhere you use tradestation. Would also be interested to see a screenshot one day of how you are setup for intraday trading.
3) Have you ever considered Disqus for your comment section? I think it gives people a chance to develop more of a personality and has certainly increased dialogue at other sites.
I’m also interested in the above from Brad.
Keep up the great analysis Corey.
Brad,
Keep up the comments! I strongly encourage them and I know the other bloggers appreciate them as well.
1) Not specifically my station, though I reveal some of my screens at times through chart examples in TradeStation. I’ll try to do a snap of my workstation and post it soon – I just got a new amazing computer so I’d be thrilled to post it.
2) I publish images from StockCharts mainly because that is the format most readers are accustomed to and can replicate for free. Plus, I love the cleanness/crispness that displays from that website. They compress the most data neatly into a small space – TradeStation doesn’t do as well (or at least I can’t make it look as good).
Generally, I reserve sharing how I set-up my screens in detail to my clients of my mentorship program, though I don’t see the harm in snapping a pic and perhaps not going into as much detail. I do lay it all out on StockCharts examples though, but of course there’s more I’m doing intraday than I share on the blog.
3) I haven’t heard of Disqus but I will certainly check it out. I’m always looking for upgrades and suggestions and am about to make a major change to the site so I appreciate any feedback/thoughts/suggestions. I strongly want to encourage more reader participation and interaction both with me and with each other and I would be happy to install such an upgrade or enhancement.
Nice trade Corey, and an excellent piece as always, I took it, too, I called it a cruise control trade (fill the gap, set the stop, and let it run), which is quite different from the chop-chop of recent times
wrote about it briefly and linked to your post
Great post Corey. Also, to follow up on the disqus suggestion, I frequent quite a lot of blogs and I think that the use of disqus as the comments engine has a huge impact on reader interaction and participation. I highly recommend it.
How can I find out more about your mentorship program?
Happy New Year!
I bumped almost accidentally into your blog a few weeks ago and try to read it daily; your posts, as this one, are very instructive even if i do not daytrade.
Happy New Year
Planet,
I’ll do so. Feel free to email me regarding the mentorship program. There’s no ‘one-size-fits-all’ approach or information I can give you in a single post.
LP,
You too!
Avi,
Thank you for your comment! The patterns I discuss are applicable to all timeframes, but the parameters and targets (and stops) are different. I tend to focus on salient concepts that are applicable across all markets, though I tend to specialize in the Dow.