Another Trend Style Day Emerges

Apr 16, 2008: 11:06 PM CST

Wednesday’s price action resulted in a type of “Trend Day” which gave nimble and aware traders an excellent opportunity to profit.

Let’s take it point by point.

1. The morning opened with a gap just at 100 Dow points ($1.00 on the DIA). This was your first clue that we might have a trend day develop. The gap also occurred well outside yesterday’s range (reference my earlier post “Three Types of Morning Openings“).

It’s sort of like a tornado forming. You get the initial watch and then the clouds get darker and the pressure changes, but none of that guarantees a tornado will develop. While there’s no guarantee, the odds now shift to favor the development.  It’s rare to have a trend day that doesn’t begin with an overnight gap.

With the ‘dark clouds’ upon us, we should be anticipating the instability to break in one direction. Either we get a gap fade, or we break into a trend day. If you tried to ‘fade the gap’ today, that was perfectly justified (I did so myself initially) but you needed to keep a closer stop due to the +100 point gap and be prepared to flip your position to capitalize on the potential birth of a trend day.

Sure enough, price couldn’t pull back and the buyers thrust price higher and that, combined with surging volume, clued you in that the day’s action could end on its highs.

2. During a trend day, it’s relatively safe to BUY any pullback or retracement, especially initial retracements to the key 20 period moving average. Place your stop beneath the average.

3. If you don’t get initial surges, or if price stalls, it will be safe to assume that the next moving average period will likely hold, and so you could have placed a similar ‘buy’ trade at the rising 50 period moving average. Each subsequent reaction gets a little deeper before the market reverses. Testing the 50 period average decreased the odds a bit that the day would resolve into a trend… but even those reduced odds weren’t enough to stop the bulls.

The market surged the last two hours into the close, completing the trend day structure. Today’s action shows the potential power of trends, and how it often is a failed initial strategy to fade a trend day if it has odds of developing. Even though it looked like price may be headed lower (as of 2:00), the trend was still up and the market let you know how strong it really was, closing on the highs of the day.

We’re getting more trend days each month, so if you’re not certain about how to trend them, study them deeply and prepare yourself should we get another one soon!

2 Comments

2 Responses to “Another Trend Style Day Emerges”

  1. Perry Says:

    Wanted to say thanks for your article on the types of morning openings. My brother and I trade together and we’ve lost money on the last few trending days trying to fade the gap.

    We read your article, and yesterday we used it to identify the day correctly and trade quite well. We bought IWM calls on the open and made a handsome profit.

    We wouldn’t have been successful without your insight, so we both offer you much thanks for sharing your wisdom.

  2. Corey Rosenbloom Says:

    Perry,

    Thank you so much for the comment! I am so happy to know I helped in some way. Let me know if there is anything else I can do for you.