Daily Commentary – April 12 – Reversal
Today’s action was surprising in the degree and reliability of the (intraday) trend, especially given the down trend (intraday) yesterday and its smoothness. Today’s trend swung with reliable entries and position addition points, which could have resulted in a rather large profit.
First, the Dow reversed course when it reached support at the daily convergence of the 20 and 50 period moving averages (remember, traders cause action, not indicators).
Daily Chart – DIA
Dow Jones Swing Chart – Daily
Observations:
- Confirmed (short-term) uptrend
- Support found at moving averages, stopping the down-swing
- Momentum divergence is occurring (see bottom panel indicator) – this is ok and is not a concern yet
- The technicals of the market appear stronger than the “doomsayers” and “recession predictors” indicate
Today’s intraday action yeilded a near textbook trend with the 20 period moving average as entry signals (again, simple signals are often preferable)
DIA Intraday Chart – 5 minute
Observations:
- The Trend signal (signal line) crossed zero at 9:00am and indicated the likely end of the down move.
- The Low of the Day occurred at the support zone created by the daily moving averages, triggering a longer term trade
- A “Sweet Spot in the Data” trade (playing for a larger target) occurred with a new higher high around 10:30
- An “Impulse Buy” trade set-up occurred with the 10:0am pullback after the New Momentum High (and new price high).
- Following trades could be taken to the long side when price pulled back to the rising 20period Moving Average
- The Momentum Divergences should be a warning signal, but not enough to keep you from trading long (just not on leverage)
- The Trend became a “Creeping Trend” which punished anyone trying to short it (trade countertrend)
With the market still chugging higher, odds still favor continued upside, especially following the quick counterswing which was terminated at the moving average support.
We are looking similarly (in terms of data and price action) as we did after the “shock” decline of May 2006. So many people doubted the market, yet it continued to rise in an “oozing” or creeping trend which also punished those who fought it, yet few people rode the trend because of all the ‘doubters’.
Realize that Bull Markets climb a “Wall of Worry.” Until price falls below support AND makes a lower low, we are still in a technically confirmed uptrend and odds favor long (buy) trades.
If anything, do not fight this creeping trend by betting against it. That behavior is exactly what keeps the trend oozing (by shorts covering).
Another excellent article. I have not found anyone who explains it like you do. I have a bearish bias from my own signals, so at the moment I am staying out until my signals are in line with the trend. I am very tempted to short, but I am glad I did not do so today. Your quote above makes me feel good that I am staying out of the way: “If anything, do not fight this creeping trend by betting against it. That behavior is exactly what keeps the trend oozing (by shorts covering).”
Thank you, Lauriston. I appreciate the compliment and comment.
The exact same thing happened to me last year. After the first impulse down in May (06) I profited very nicely on the short side in the two bearish impulses that occurred (after the first impulse – can’t really predict it, but only the reactions after a shock move with higher odds), but gave up a lot of my profit when I kept trying to fight the new uptrend I did not see into August. I threw in the towel and sat it out until I could no longer deny in my charting that a new uptrend had begun… or the old one had just continued after a brief respite (especially given the weekly charts).
I attended the Trader’s Expo Las Vegas in November 06 and a few of the professional traders who would open up about live trading (which, surprisingly, is rare – at least in the Q&A sessions) said that October and November were their worst months despite the market going quite higher! It recovered 15% from its bottom. It seems professionals kept betting against it at every turn and would have to cover in haste as the market kept making new highs (which they would try to short and cover higher yet again).
We all want to be heroes and say “I made money by calling the exact top of the market” but we know in reality that just doesn’t happen. Our egos get in the way of our profits (and objectivity). All we can do is find the structure of the price data, assess current sentiment, and take the trades in the direction of highest probability. If that means going against what we feel, then so be it. I’ve made the most money when I had to literally force myself to make the trade, and I’ve lost money when I just couldn’t wait to enter the trade (especially if I leveraged it) (not always, of course, but more times than I care to admit when I get extremely bullish or extremely bearish).
Thank you for the comment and I enjoy your unique perspective and insights (as well as humor!) on your blog and hope to hear more from you soon.