Another Trend Day Down Example

Nov 12, 2008: 7:49 PM CST

While Tuesday’s action ultimately resulted in frustrating losses for ‘trend day traders,’ Wednesday’s action offered a picture-perfect example of a trend day for review.  Let’s view it.

DIA 5-min chart:

I’m reminded of the Willy Wonka song, “Pure Imagination” that states, “If you want to view paradise, simply look around and view it.”

If you want to view a trend day example, look no further than Wednesday.

Price opened with a large-scale (greater than 1%) downside gap which could not complete a 50% fill before plunging to new lows on the day.  The moving averages shifted to “the most bearish orientation possible” and early volume was quite steady (instead of the normal ‘smile’ that often occurs).

If you missed the early portion of the day, the first ‘ideal trade’ set-up then occurred at 11:30am (EST) as price retraced quickly to the falling 20 period EMA, formed a doji at the average, and then fell sharply in four bars after this, testing the $84.00 level for support.

The positive momentum divergence may have been too tempting to pass up, but remember that (virtually) all divergences are – by their very nature – counter-trend moves.

In terms of a core position (short), you should have trailed a stop just beyond the 50 period EMA and I wanted to show today’s price action as to why – even then – you need to place it *just beyond* the 50 EMA and not *at* the 50 because price nipped just above the key average before falling down, making new lows on the day and continuing its “trend day” structure into the close.

This also served as a good “get short” entry as well.

Price ultimately broke below the 20 EMA and retraced once more to the ‘falling 50 EMA’ before finding two sudden intra-bar tests of resistance (also excellent short-entry trades) and plunging yet again to new lows on the day and into the close.

Once again, it’s best to “throw oscillators” and most indicators “out the window” on perceived trend days and focus almost exclusively on the moving average structure as support/resistance (or entry/stop-loss).

This leaves us looking pretty weak on the daily index charts.  Take the time to look closer at the intraday action for your own annotations and insights.

4 Comments

4 Responses to “Another Trend Day Down Example”

  1. David Says:

    Thanks Corey.

  2. Anonymous Says:

    You know Corey.. I read about 30 sites every morning. There are about 5 I actually pay attention to. Yours is one of them. I assume you keep this up because the blog makes money and most are more interested in readership that quality. However, regardless of your motivation, you consistently provide a simple and clear perspective to give thought about the previous day. Most blogs go on and on about this news and that news blah blah blah. You and Stewie (I’m sure you know who he is) provide a constant reminder that it is price action and charting that matter more than the news. The overall news brings us here, but the charts remind us of the bigger picture.

  3. Anonymous Says:

    Continued.. meaning.. a day of good or week of good news doesn’t change the facts. 🙂

  4. Corey Rosenbloom Says:

    Anon,

    I appreciate that deeply and am thankful for your comment and for reading.

    Initially, I started blogging because trading all day was endlessly boring, and I occupied myself while in trades (that I knew I shouldn’t exit until a target or stop was hit) by writing about it. As I developed more professionally and readership grew, I had to keep up by being more professional and providing more information. It’s a passion that is quite enjoyable and I love the interaction – it keeps me from staring at multiple charts all day and it keeps me accountable.

    The only advertising I allow is the MarketClub on the blog and have removed all other ads as I wanted to focus on the readers’ experience and wanted to build loyalty.

    If you have any suggestions on improvement or requests, please let me know.