Classic (though record) Trend Day Example

Oct 13, 2008: 8:37 PM CST

What a day and what a recovery we have underway!  The major US Equity Indexes surged over 10% today, with the Dow gaining a record point gain in a singular day.  It gave us a good example of a classically defined “Trend Day” so let’s waste no time in looking at this example.

DIA (Dow Jones) EFT:

This rally was long overdue and the magnitude of it should not be all that surprising, given the rampant volatility climate we’ve experienced recently.  Let’s define a couple of points on a classic “Trend Day:”

Generally, Trend Days open with a (relatively) large Index Gap
Often, Volume at the Open is larger than prior opens (this was NOT the case today)
Price Fails to fill the opening gap
Price finds support at multiple tests of the 20 period EMA
Price NEVER crosses beneath the 50 period EMA
The Market opens at its lows and closes at its highs

There are many other characteristics of a trend day, including Breadth insights, TICK/TRIN, prior day’s range, larger time-frame, etc.

Let’s keep it simple and just focus on the large gap open and finding repeated support about the rising 20 period EMA.

This was the case until the 2:00 break, but the 50 period EMA supported price, and created a clean retracement buy signal.

Often, a hallmark of trend days is that most people can’t resist ‘fading’ them, or are – in this case – looking for zones to get short.  That is a fatal strategy.  Once you feel the odds are strongly in favor of a trend day, establish a core position that moment and place a trailing stop beneath the 50 period EMA and plan to exit at the close – if it is a true trend day, you will make profit no matter where you enter originally.

You’re able to scalp each time price retraces to the 20 period EMA with a tight stop beneath it.  How aggressively you trade can dictate the size and frequency of your trading activity on perceived trend days.

The SPY shows an identical chart as the DIA.
SPY (S&P 500) ETF:

Let’s look at the Sector Breakdown via StockCharts of the day’s activity:

Energy surged the most on the day, with XOM gaining 17% and Chevron (CVX) rising 20%.  Materials came in 2nd on the day’s gains, with the Consumer Discretionary (retail) sector underperforming the S&P and all other major sectors (posting ‘only’ a 4% gain).

Morgan Stanley (MS) surged almost 90% in a single day, though the ‘gold’ was not distributed throughout the broader Financial Sector – it only gained just under 8% on the day (nothing to sneeze at, but clearly not part of the larger gains on the day – how amazing is that).

Congrats to all of you who did well today, and for being ‘vindicated’ (as some of you emailed me) that we were due for a bounce.

Still be careful – we’re clearly not out of the ‘volatile’ woods yet.

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