Stepping Inside Tuesday’s Powerful Trend Day

Mar 10, 2009: 5:56 PM CST

We finally got that ‘oversold bounce’ we’d been anticipating – though that was an understatement!  Let’s step inside Tuesday’s “Trend Day” action to see how one could have profited from the intraday structure and managed risk accordingly.

DIA 5-min (March 10, 2009):

First, the daily structure (in terms of two dojis in oversold conditions at the bottom Bollinger Band) seemed to indicate we were due for a bounce.  Of course, that structure didn’t say how powerful today’s action would be, but that odds favored an up-move over a down-move.

The first clue comes from the pre-market action (where futures were markedly higher) which was confirmed by a large upside gap (greater than $1.00 in the DIA).  As the market opened, price ran still higher and no attempt whatsoever was made (by sellers) to fill the gap – by this time (around 10:00am) you should have been playing for a Trend Day (because of the large gap and drive off the open).

This meant you should have turned off your indicators and focused on your moving averages (whatever periods you use – I use 20 and 50 EMA intraday) to set-up trade entries (on pullbacks).

Strangely enough, Trend Days are the easiest days to trade (buy pullbacks, trail your stop beneath either the 20 or 50 EMA) though so many people have difficulty because they just can’t fathom the price going higher – they’re just always in counter-trend mode.  Granted most days aren’t trend days, but when they are, all other tactics (fading intraday highs; selling overbought oscillators) go out the window.

That being said, price consolidated into a rectangle (correction) into the 20 EMA and the Bollinger Bands “squeezed” price which preceded a huge surge up (further confirming the Trend Day structure) and then price formed a gentle ‘flag’ back to the 20 EMA.  I love to see dojis form at expected moving average support – they allow for you to use a tight stop and play for a large target (relative to your stop).

I drew an interesting trendline, which indicates how price resisted the level (around noon) but once it broke-out to the upside, it used the trendline as support.  Ultimately, price retraced to the rising 50 period EMA (not an unexpected development) which threatened stops (trailed beneath the 50) and gave aggressive traders fresh, low-risk entries (buys).

And as wished, the market headed higher and formed additional dojis at the 20 EMA before spiking back up and closing at its highs.

If you want an ideal or “Picture Perfect” Trend Day, study today.

Corey Rosenbloom
Afraid to Trade.com

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Comments
  • Jean

    I would be very interested in your results. Thank you.

  • jeremy

    Corey,

    It's a plausible scenario, since we have not had downside capitulation yet.
    I sense one should perhaps not jump in short just yet, Tuesdays volume suggests there might be some more upside to come after some consolidation, the bulls have woken up and their hopes may not ebb away so soon.

  • Jean,

    Thanks. I'm not familiar with that strategy. It'd be easy to test out for edge. I'll have to do more work with that one.

  • Jeremy,

    I'm along with your line of thinking - fractal 4 up then into resistance (possible Fibonacci or moving averages) which gives us the final "really scary" Wave 5 down - capitulation forms, a (short-term?) bottom is formed and we do a big move up after that.

  • Jean

    Very useful lesson you have shared - do not short $1 gap on the DOW. What are your thoughts on another strategy: "Buy the five minute high and sell at 10:00". This could have been useful yesterday.

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