Interesting Developments in Friday Trend Day Down

Jan 31, 2009: 6:06 PM CST

Friday gave us yet another “Trend Day Down” in the market – making two in a row – but there’s something quite interesting you need to review about Friday’s Trend Day action.

DIA 5-min:

DIA 5min trend day

Do you know what it is without looking?

At 1:00pm, all short stops were triggered, knocking trend-day traders out of their positions (unless they used wide stops) before reversing back down through support immediately into new intraday lows, officially confirming (and springing) a Bull Trap.  Let’s take it step-by-step.

The day actually opened on an upside gap, which gave a low probability of a trend day (down) developing.  However, the gap was quickly (instantly) filled and price then broke sharply to new lows with a large red bar.  Price skirted lower and we registered a new momentum low, signaling that we should short the first pullback to the 20 EMA when it came.

It actually didn’t (officially) come at 11:00, as price failed to muster enough strength to test the EMA though a bear blag did develop and price broke down out of the flag to new intraday lows at 11:30.  We should have been suspecting a trend day was developing at this point because of the positioning of the key EMAs.

Price did form a positive momentum divergence, taking us all the way up to the falling 50 EMA and knocking out any stop-losses placed by the sellers – easy come easy go.  If trading were easy, everyone would be doing it!  You were right to take a stop-loss there, but not right to buy (wait for the EMAs to cross ‘bullishly’ before buying).

Price then plunged over the next hour to new lows, leaving bears scratching their heads as to why they were just stopped out and price plunged to a new low.  It’s an example of either choosing to use wider stops, thus opening yourself up to larger losses, or tighter stops which prevents large losses but also decreases your win ratio.  One could have an entire discussion on this topic alone – it’s up to us to make the choice.

After making new lows at 1:30, price retraced into an ABC pattern that resembled a Bull Flag that took price back to the falling 50 EMA, nipping above by a few pennies.  You should have noticed the doji or indecision candle that formed at resistance, along with the long upper shadows and taken that as a clue price might be about to make a new run to the downside and indeed it did.  Price made new lows on the next downswing into 3:30 before reversing in a counter-move back up.

If felt like the bulls were giving it their all throughout the day but they kept falling short.  It also looks like we’re heading down in a fresh downswing on the daily charts (and weekly as well).

Continue to study this day for additional insights so you can recognize the patterns and act on them in real time.

Corey Rosenbloom
Afraid to Trade.com

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9 Comments

9 Responses to “Interesting Developments in Friday Trend Day Down”

  1. Matt Says:

    Hi Corey, the heaviest volume came in the last 5 minutes and it was positive. Do you see anything technically that is indicating we will bounce once again off the Dow 8k mark or head down to test the November lows? Wondering also what you see technically with FSLR. That is a high flying mover with lots of price action which makes for nice moves with the options. The daily chart shows a channel uptrend which narrowed on the way which up(bearish) and broke down, but has now been channel trading widely last few weeks. Thanks!

    Matt

  2. Corey Rosenbloom Says:

    Matt,

    It’s generally a good sign when volume swings up with price going into a weekend. It’s either a sign people are comfortable to hold long over the weekend or that shorts are scared to hold long over the weekend. I take it swing by swing and focus mostly intraday but looking at the daily picture, I honestly don’t see how we’re not going to test the November lows. Look at both the daily and weekly chart just on a price basis. Both appear to be in a downswing headed there. No support beneath. Only resistance above (prior swing highs, EMAs, Fibonacci).

    I’ll have to analyze it more deeply but at first glance at FSLR, looks like a decent bear flag into resistance on the weekly chart. On the daily, we have an inconclusive picture as the 20 and 50 EMAs have flattened out and price is smack in the flat range. Want to see it move one way or the other. We may have completed a 5-wave Elliott impulse (of some sort) to the upside which finished at the $160 level. May be part of a larger move but usually after 5 waves, you get a corrective phase.

    That’s just quick analysis without going into much detail so take it for what it’s worth.

  3. Matt Says:

    Thanks!

  4. p Says:

    not a bulltrap on a higher time frame though like 15min – just a bear flag trigger.

  5. Corey Rosenbloom Says:

    P,

    Good point. I tend to over-focus on the 5-min when trading and to set-up a bear flag on a higher timeframe, it will trigger buy signals on the lower timeframes.

    It’s a good reminder to keep multiple timeframes open to assess the structure and see what other traders are viewing/thinking/trading there.

  6. Gawed Says:

    Hey Corey,
    sorry to comment on this so late but got behind on my homework.

    i’m just confused about the shadows you talk about on the article. is it the bollinger shadows or what?

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