Classic Trend Day Helps the Bulls

Nov 13, 2007: 10:28 PM CST

The strength of today’s upwards action may have shocked some people, but let’s look at some factors that let us know today’s action wasn’t so surprising indeed.

First, we were deeply oversold by most oscillator indicator readings (RSI, Stochastic, etc) on the US Index Daily Charts.

Second, we experienced a large volatility, high momentum move down and there (almost always) must be a reaction against that initial momentum impulse at some point in a relatively normal ‘swinging’ market.

Third, some sentiment readings were showing extreme levels, meaning that the market was almost certainly due to ‘correct’ this excess.

Today’s action was certainly fueled by certain ‘short covering,’ and the entire rally may be deemed to be short covering only, but we still play one swing move at a time and so the ‘easiest course of price direction’ is up for the brief moment.

Let’s look at the strength from the intraday perspective of the Dow Jones:

This shows a classic (and textbook) “Trend Day” which you should save, annotate your own way, and catalog for future reference.

It was more clear in most stocks and especially the DIA, SPY, and QQQQ, but there was a large impulse (gap) at the open that could not be ‘faded’ or closed suddenly. When an initial gap cannot be closed, especially in the Indexes, then odds favor a large trend move will take place and you should go with leverage in the direction of the initial impulse. That strategy would have worked wonders today.

Again, I suspect the day started with a large buying move on the good retail news which triggered an ‘oozing short-covering’ rally that lasted virtually all day unabated.

The Dow Jones Daily chart shows a decisive victory for the bulls that’s been tainted by lighter volume than two previous ‘distribution’ or sell-days:

Here are a few intraday highlights and clean trend day patterns from some equity leaders:

Goldman Sachs (GS):

I could really say much more about this ideal stock behavior, but annotate it for yourself and learn valuable lessons about a trend day.

Apple (AAPL):

Bottom line, when a stock moves up (or down) $16.00 in one day, pay attention. Catalog the intraday development for further study.

The initial impulse and failure to close the gap clued you in to the major possibility for a large trend move.

Research in Motion (RIMM):

The same story remains. Expect trend day from large impulse open. Do expect some sort of reaction against the gap first, though.

There was solid support at the convergence of the 20 and 50 period 5-minute moving averages which set up a sort of “Super Buy” trade (Impulse Buy, First Cross Buy, Dual Support Buy, Gap Fade Failure, etc etc etc) that set-up a trade with a potential target being the 200 period MA. A sort of sloppy bull flag formed and as price situated comfortably about the rising 50 period MA, the break of the flag setup the “Bull Flag” entry which played for a “Measured Move” target which was achieved.

Classic, textbook stuff!

I’m very happy for the bulls today, and for the clean patterns that emerged following the large impulse in most major stocks. You really only need to maximize your gains on a few such days per year to do very well as a trader.

The problem… trend days occur so few times per month and they often occur as a result of failed expectations (and stop-losses) of one side of the market (in this case, the bears).

My advice is to take today’s action, model it across as many stocks as you can, and internalize the patterns that are contained in such massive trend days. Next time when you perceive a “Big Move” setting up, you will be in a better position to ride the trend instead of fighting it for small, insignificant profits at best.

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