Monday’s Average Trend Day Down

Jan 12, 2009: 9:46 PM CST

The market gave us another “Trend Day Down” structure Monday – let’s take a look inside the DIA 5-min chart structure to see choice trading opportunities within the swift down-current that was so pervasive all day.

DIA 5-min Chart:

As volatility begins to pick back up in the marketplace and a clear direction emerges – not saying we’re there yet but when it does – then expect more of these trend days that open at one extreme and close on the other.  Learn how to trade a trend day.

Generally, trend days start with a large, unfilled morning gap and price continues in that direction all the way to the close.  Today, we didn’t get a large gap (though it was $0.40 in the DIA) and price scarcely attempted to fill that gap.

Our first “Ideal Trade” of the day was an “Impulse Sell” that formed on the rectracement against the new price and momentum low (as price pulled back to the falling 20 EMA and formed a doji).  Price quickly swung down an dmade a new low into noon (on a momentum divergence) as price chopped around in a rectangle pattern (specifically a “Measured Move” price equality pattern… or A to B = C to D).

Though we might should have suspected a trend day, during this consolidation, price could have broken either way and may have turned into a “Rounded Reversal.”  Ultimately price broke sharply to new lows after testing the falling 50 EMA (setting up another “ideal trade” and threatening any stop-losses properly situated above it).  It was at this point (2:00pm) that a Trend Day structure was confirmed beyond a reasonable doubt.

As such, you were to short any rallies to the 20 period EMA.   Notice that doing so ‘worked,’ though price formed a “Three Push” reversal pattern to close out the day’s trading, though it found resistance at the falling 50 EMA.

Remember, during a trend day, it’s best to ‘throw away all indicators’ and focus exclusively on the moving average structure, setting up trades on retracements.  Oscillators tend to give false signals as price continues to get more extended in a given direction.

Corey Rosenbloom
Afraid to Trade.com

13 Comments

13 Responses to “Monday’s Average Trend Day Down”

  1. position_trader Says:

    Hi Corey!

    Which signals do you use to get in on a positive MACD divergence? I see one developed in the charts earlier today but the price didnt follow through. Thanks!!

  2. Corey Rosenbloom Says:

    It’s the “3/10 Oscillator.” All divergence signals are best ignored on trend days, or at least taken as signals to retrace back to the 20 EMA but nothing beyond.

    The first divergence ‘got its target’ at the 20 EMA but only led to a consolidation. The last one also got its target but the day ended before any follow through could occur.

  3. position_trader Says:

    ” All divergence signals are best ignored on trend days, or at least taken as signals to retrace back to the 20 EMA but nothing beyond.”

    Thanks for the above!! Will keep it in mind.

  4. Corey Rosenbloom Says:

    Just like they always say: Oscillators work best in range-bound environments while moving averages work best in trending environments.

    You wouldn’t want to use a moving average in a range-bound environment (in terms of expecting S/R) and vice versa. Indicators have their ‘day in the sun’ or ideal condition where they work… and don’t work.

  5. Trader Mom Says:

    Key is how to find what kind of env. the market is in ahead of the time. Or use 2 trading systems to complement each other.

  6. Corey Rosenbloom Says:

    Trader Mom,

    If only it were that simple. Often, the market will start in one direction, consolidate, and reverse into the other. Trend Days are difficult to forecast ahead of time, but typically proceed from dojis or consolidation.

    I think using dual systems or perhaps “if-then” analysis is the way to go and manage risk as the day progresses, sort of like the “Day Structures” as taught in Market Profile Theory.

  7. abe Says:

    “Oscillators tend to give false signals as price continues to get more extended in a given direction…” wouldn’t it be valid for any time frame, actually?

  8. Gawed Says:

    hey man, thanks for the post. where would the stops be set up in any entries: above 20 ema or 50 ema?

    wish one could see trend days since the moment gap isnt filled lol

  9. Corey Rosenbloom Says:

    Abe,

    Yes, it affects all time frames. Generally the patterns I discuss are applicable on all time frames, I just choose to concentrate on the 5-min chart because I’ve found it suits my balance between risk and patience – I tend to want quick results with minimal holding periods.

  10. Corey Rosenbloom Says:

    Gawed,

    Would be excellent, wouldn’t it? Not all gaps that go unfilled lead to trend days, though.

    It’s up to you but if you want a tight stop, you go slightly beyond the 20 EMA but if you want a (probably) better approach, the stop would be placed above the 50.

  11. Tom Says:

    Cory,
    I really appreciate your posts related to “trend days”. It is fast becoming my favorite and most profitable set up to trade. Could you do an analysis of the history of trend days (up and down) and the frequency by month, similar to what you have posted in the past related to gap fades? Thanks so much

  12. Corey Rosenbloom Says:

    Tom,

    The trend day structure has been wonderful for me as well. It doesn’t always work, but edge in the strategy comes from when it works, one makes far more than when it doesn’t, depending on the style of trading.

    I’ll have to do all that in TradeStation and if it’s easy to format and present, I’ll do so. Thank you for the inspiration!

  13. AtT Best of 2009 Part 1 | Penny Stock Trading System Blog Says:

    […] Monday’s Average Trend Day Down […]