Trading a Trend Day Down

Mar 29, 2008: 1:32 PM CST

Friday’s action in the US Indexes represented a typical “Trend Day Down,” which provides opportunities for excellent profits with minimal risk.

How do we trade trend days?

Let’s look at the DIA (Dow Jones ETF) as a proxy to see some opportunities:

First, I must say that this was not a ‘classic’ trend day because it did not begin with an opening (downside) gap. Most trend days begin with some form of impulse.

In “Market Profile” terms, this would be more akin to a “Double Distribution” Trend day where there was an initial balance that was broken in favor of an afternoon trend.

Notice the triangle consolidation pattern that formed into the 1:00pm time. Also, notice major support around the $123 (Dow 12,300) area, which held the bottom of the developing triangles.

Descending triangles (such as the one drawn in blue) often break to the downside, and that should have been the initial thesis upon which you operated until proven otherwise… in other words, be expecting a potential downside break.

Once the triangle broke at 1:00pm, this could have been your initial entry, but I prefer to wait for a ‘throwback’ swing (or rally) to add confirmation to the pattern and try to play for better position with minimal slippage (and better stop-loss placement).

The “throwback” came at 1:30 when price again retested $123, and this set up the most powerful trade of the day. You would have been justified in putting on a position and playing for a larger target based on the structure. The initial target (of the triangle) projected price near $122.40 (target shown in dotted black line). The overall trend structure caused price to trade beyond this zone to achieve a lower-low and actually close on the lows for the day.

Each of the subsequent red arrows shows a proper “short entry” with minimal risk trade you could have taken  with leverage if you were aggressive and played for a new swing low to occur. You could have easily exited at the target, sidestepped the pullback (rally) and then entered short again… this would have been a very aggressive strategy.

Nevertheless, once you identify a trend day developing, throw away all your oscillating indicators and simply use moving averages to simplify trade entry and risk management. Notice how the trades are set-up via the resistance provided by the declining 20 period moving average only.

Check out INO TV (free) for more educational lessons, or join up with the Market Club to learn and discuss with other traders.

Early identification of a trend day can lead to significant profits if traded aggressively within the structure the market gives you.

Comments

Treasury Proposes Broad New Powers for the Fed

Mar 29, 2008: 12:02 AM CST

According to the New York Times article today, the Treasury Department is proposing that the Federal Reserve receive bold new powers to stabilize potentially shaky financial markets.

Edmond Andrews reports that “The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.”

The move is done to unify the various governmental agencies that are charged with financial regulation with the goal being to prevent the kind of crisis that evolved from the “Credit Crisis” lending problems that have threatened global markets.

According to administration sources, “the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.”

According to a draft speech, Treasury Secretary Henry Paulson is expected to say “I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every 5 to 10 years [but] am suggesting that we should have a [more flexible] structure that is designed for the world we live in.”

While Congressional Democrats will likely be pushing for stricter governmental regulation, it will be interesting to see how the eventual changes take place, or if they will take place quickly or incrementally.

Critics will argue that this measure doesn’t go far enough to add stricter regulation, and others will argue that the changes will be far too strict.

I suggest watching the development of this story closely in the coming weeks and months, and what it might mean for institutions, hedge funds, banks, and other major financial institutions. There is no doubt this story will be covered from a variety of perspectives soon.

Comments

On What You Can’t Control

Mar 28, 2008: 4:58 PM CST

I was inspired by a recent article in my local paper entitled “What Then Must We Do?” which tackles the sense of ‘loss of control’ or uncertainty that is so common to stock market participants.

Author Bonnie Roberts of The Valley Planet pondered a list of 45 humorous points that were completely out of her control, and I wanted to list a few of the funnier points and then tie it into the Stock Market.

See if you can identify with some of these topics that Roberts notes is totally out of our control:

  • The destruction of sand castles, no matter how far from the shore
  • The number of letters in the Russian alphabet (33 letters)
  • Detours when we’re late
  • That Jokers are wild
  • Not being “007″ and knowing whether to cut the blue or red wire
  • Ant invasions in Africa
  • Access to mysteries like Stonehenge, Area 51, or the Bermuda Triangle
  • That chickens have waddles
  • Cul de sacs that are not marked

… and many other factors out of our control.

Now, let’s think about the market! What can we not control in the market?

  • Whether or not our next trade will be a winner
  • Earnings reports and the market’s reaction to them
  • Fed announcements and the subsequent sometimes violent reactions
  • Mergers, acquisitions, and take-over announcements
  • Morning/Overnight Gaps against our positions
  • Jim Cramer’s recent recommendation (or stocks he says “Sell Sell Sell!”)
  • Major Analyst stock upgrades or downgrades

There is so much we can’t control in the market, and so we should not constantly stress ourselves beyond what we can reasonably handle. Realize your limitations and still play the game as best you can, given the fact that so much is out of your control.

You control what stock or ETF to trade, when to buy and sell it, where to place your targets and stops, and how much money (shares) you intend to place at risk. Beyond that, there’s not a whole lot else you can aggressively influence the outcome of a given event.

So, minimize your risk, lower your expectations (so you don’t get psychologically hurt), and play the game! Oh, and try to have fun as well.

Comments

Dollar Reflects Off Resistance

Mar 28, 2008: 12:01 AM CST

The US Dollar Index continued its downtrend recently, by failing to overcome resistance via the 20 day moving average.

The 20 period moving average (especially along with the 50 period moving average) has provided a barrier that is too significant for the ‘dollar bulls’ to overcome with any lasting success.

The recent rise (counter-trend swing) was a little surprising, given the timing, and further complicates the news/profit relationship. The Federal Reserve cut interest rates .75 last Tuesday, which is a move that is traditionally bearish for the US Dollar Index because it makes our currency less attractive to foreign investors. Nevertheless, the dollar rose sharply following this announcement. Of course, this news was already factored into the price by the market participants, so it should have been surprising to the astute market trader.

Nevertheless, until proven otherwise, the US Dollar Index continues its pathway to new lows.  Short-term, however, a positive momentum divergence has formed on this recent price swing down which could temporarily contain a bit of severe bearish action.
The weekly chart is a picture-perfect example of why trends have greater odds of continuation than of reversal, and how moving averages can structure trades and risk-management points:

Notice the structure of the moving averages – they are in the most bearish orientation possible.

Notice how price has been unable to breach the falling 20 week moving average with any conviction at all. Until price shows some consolidation, I would base my inter-market work on the notion that the dollar is weak and will likely continue to deteriorate for an unknown duration into the future (according to the chart structure).

As a nation’s currency is usually indicative of the health of that nation, what does that potentially say about the current state of affairs in the US Economy?

Comments

Smooth Swing Action Trading Today

Mar 27, 2008: 5:52 PM CST

Today’s intraday price swings were smooth, pronounced, and stable. It was an ideal day to be an intraday ’swing’ trader.

By ’swing’ trader, I mean simply trying to capture the market’s most probable sustained price action in one direction until that direction is reversed by the opposing force. The trend was down overall, but there were amazing swings that the nimble traders were able to capture both up and down.

I know I’ve said this 100 times but the first play of the day when the market gaps is to trade against the gap to “Fade the Gap” back down to the opening price. That trade working out instantly today, giving you almost 70 points of potential profit right off the bat.

The market continued its swing lower before forming a new momentum low and then ralling up to find resistance near yesterday’s close (a common phenomenon). Rather than continuing downward, bulls found prices attractive and then forced prices to eject upwards at key support (from the confluence of the 50 and 20 period moving averages) which completed the “measured move” portion of a bull flag that most people – myself included – didn’t see coming (because my bias was strongly to the downside today).

Nevertheless, the bull flag terminated exactly at the price that it was projected to do so (measured move), which happened to correspond with the falling 200 period moving average. A dual test of this zone (and failure to rise above it) set up a more powerful short-sell trade which trended down and tested the morning session’s lows (and helped validate some of the earlier pessimism in the market).

Price turned, forming a momentum divergence and swung back upwards to test yesterday’s closing price, and failed at this point to tread any higher. The failure swing hinted that lower prices were yet to come.

Unfortunately for the bulls, the market closed once again on its lows for the day (despite the after-market up candles after the 4:00 bell rang), which certainly depressed some of the buyers and validated the sellers.

Nevertheless, there were still clean swings and clean patterns within the structure of price that set up profitable, low risk trade ideas.

Comments
 Page 506 of 622  « First  ... « 504  505  506  507  508 » ...  Last »