Another Trend Day Down

Jan 12, 2008: 12:08 PM CST

Friday was yet another major trend day down for the major US Indexes. Let’s look at some of the simplest trades you could have made within that intraday structure:

The first clue that Friday would be a trend day (down) was the opening gap. Opening gaps do not always precede trend days, but the initial imbalance in supply & demand increases the odds.

While the first play of a gap open is to “fade” the gap, if the gap fails to close within the first hour or two, odds also increase for a trend day. By this time, you should be using other indicators such as volume and moving averages, as well as perhaps the TICK, TRIN, Breadth, and VIX for confirmation/non-confirmation.

Once you identify with greater probability that the day’s structure will indeed be a trend day, it is then time to establish a core position to hold into the close and then swing trade around that core.

In this case, any pullback to the 20 or 50 period declining moving averages on the 5-minute chart set up a nice, risk-controlled, high probability trade. I have circled such instances in the above chart.

As a bonus, a beautiful bear flag pattern (or lightning bolt) sets up which achieves its target perfectly. It’s ok to use leverage or a larger position when these patterns set up which clarify entries and exits, especially for traders who love visual pattern recognition.

Often, on trend days, it’s best to throw most oscillators off your chart as they will usually degrade any edge from the underlying trend/price/volume structure. Recall that virtually all ‘popular’ indicators lag price/volume action.

Early recognition of a trend day can lead to significant profits when you trade them aggressively, and significant losses when you attempt to “call a bottom” or trade counter the establishing trend.

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