The Amazing Surprising Trend Day of March 23

Mar 23, 2009: 3:58 PM CST

Hats off to the Bulls today for a 7% across the board equity rally.  Today’s move shatters key resistance at 805 and alters the daily chart structure – but for now, let’s step inside the Trend Day for March 23 to see how we could have recognized it and how we could have traded it.

SPY (S&P 500 ETF) 5-minute chart:

The Futures market had been up overnight, and price gapped up in a larger than normal gap (which had low odds of filling).  Since most trend days begin with a large overnight supply/demand imbalance, that should have been the dominant thinking going into today’s trading, particularly since Treasury Secretary Geithner (finally) announced a Plan that – apparently – Wall Street and the Banks approved.

Now, looking at the Daily Chart, odds favored a continuation of the down-swing that began last Thursday, particularly into key resistance.  A lot of people – myself included – were short going into Monday’s open.  It is my belief initially that today’s upward momentum was caused in part if not in most part by fund short-covering (short sellers’ stops being triggered as price inched its way higher).  It also helps remind me why I much prefer intraday trading – you get to take advantage of overnight gaps rather than being victim to them!  I do most of my trading intraday though I still like to keep some swing trades on – I just hate the gap-risk like today’s action shows.

Back to the intraday structure.  If the assumption becomes “Today has good odds to be a Trend Day” then the strategy then becomes to throw away all indicators and then rely only on key moving averages to trail stops and time entries.  The moment you suspect we have a trend day, it is a good idea to go ahead and join in the direction of the supply/demand imbalance, because if it IS truly a trend day, then the market will close on the highs or lows of the day – meaning, you don’t need elegance of trade entry to be profitable.

The simplest strategy is the following:

Buy any pullback to the 20 period EMA

Trail your stop beneath the 50 period EMA (I’ve found it’s also helpful to wait for two closes on the 5-minute chart before exiting a supposed trend day position).

Needless to say, this strategy will not work if the day does not resolve into a Trend Day, or the structure shifts to form a Rounded Reversal Day.  You’ll also need to go back and do your own analysis on Trend Days to see how this strategy performs.

The TICK, TRIN, Breadth, and Volume (among other aspects) can help serve as confirmation/non-confirmation on days you suspect as developing the Trend Day Structure.

Let’s take a quick look at the ‘damage’ done to the bearish position on the Daily Chart.

S&P 500 Daily Chart:

Price is now above the 20 and 50 day EMAs (though it is coming into resistance at the 20 week EMA).  Also, price broke above confluence Fibonacci resistance at the 795-805 level today (notice how price surged once it broke 805 on the S&P on the intraday chart – that’s because that level served as a final “Line in the Sand” for bears – many stop-losses were nestled just beyond that level).

Because price jumped above the January Lows at 804, today’s action disqualifies a Dominant Elliott Wave count – that we were in a Fractal Wave 4 of (5).  Elliotticians will have to shift to an alternate count – one of which is that Wave (5) has already completed.  I’ll address that in a separate post.

Keep digging deeper for signs of continual strength, or hidden weakness that has formed off today’s ’surprising’ rally.

UPDATE:  SMB Training Blog featured a personal story of a trader who struggled with today’s Trend Day, yet learned valuable lessons for improvement.  Check out their post “Planting Seeds.”

Corey Rosenbloom
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade
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29 Comments

29 Responses to “The Amazing Surprising Trend Day of March 23”

  1. Anonymous Says:

    PSW
    pwrt11@gmail.com

    Any update on the 1937 bear market pattern?
    Always great analysis.
    Thanks

  2. Anonymous Says:

    …or that we are in the ‘bearish’ scenario where this is wave 4 and 5 is still ahead; hope not.

    Abe

  3. Anon Says:

    Corey, Let’s call it the Elliot wave is a scam. Someday, you will.

  4. rio Says:

    corey, could we be in wave c already?

  5. Anonymous Says:

    if you take requests?? love your examination of the xhb. thanks, john

  6. RK Says:

    Hi Corey,
    I have been following your prior posts about strong trend days. I was following the pre-market action and the first 5- 10 minutes of trading and surmised (or may be lucked out on this :-) ) that today was a trend day up and rode a couple of financial stocks for a nice profit!!! I wish I can do the same on the reverse side on trend day down.. I have a hard time taking any positions on a trend day down as with my limited capital I am afraid to short em.

    Once again thanks for your educational posts.
    -RK

  7. Corey Rosenbloom Says:

    PSW,

    I did a follow-up post:

    http://blog.afraidtotrade.com/resolution-of-the-1937-dow-bear-market/

    Basically, in 1938, we got a 61.8% ABC retracement up (after the 5 completed) but that low was not the bottom. We made new lows a few years later before putting in the final bottom in 1942.

    Seems still to be playing out eerily similar.

  8. Corey Rosenbloom Says:

    Abe,

    I’m still teetering between both counts and will do so for the time being. 666 may prove to be a decent intermediate low for now, and the larger rally we’ve been expecting may be arriving just a little early.

    As to what happens after that rally, that’s too far out into the future. My mantra is one swing, one day at a time.

  9. Corey Rosenbloom Says:

    Anon,

    Too funny. I call the Elliott Wave an indicator just like RSI and Stochastic. People don’t get upset when RSI registers a false overbought reading or the stochastic, CCI, 3/10, MACD or anything register a false divergence.

    Why should we get upset when Elliott Wave registers a false start/false signal, as I feel has happened?

    It’s just one tool in my arsenal of trading tools that include oscillators, trendlines, moving averages, volume, price, etc.

    We’re trying to assess odds, probabilities, and the ‘weight of the evidence.’

    And if I find Elliott doesn’t work, I’ll abandon it. But so far it’s helpful to me.

  10. Corey Rosenbloom Says:

    John,

    That’s a good suggestion. I’ll be happy to tackle a chart of the homebuilders. Seeing strength in them would be a catalyst for a strong rally, I believe. Absolutely.

  11. Corey Rosenbloom Says:

    RK,

    I’m glad to hear my posts have been helpful! I’m so glad you turned a profit today. As you said, early recognition of a Trend Day developing is key.

    To me, I prefer down trend days because the market has a tendency to fall harder than it rises (though that may be hard to believe given today’s action!).

    “Going short” is not much different than going long, but there’s definitely a stigma to shorting. Like anything, if you do it enough times, it becomes second nature.

  12. vijay veer singh Says:

    Hi Corey,
    I would appreciate if you also take the scenario that we are in a fresh upmove finishing one leg of downside at 667 along with the scenario you are covering.

  13. CastorTroy Says:

    Informative post as always, thanks.

  14. CastorTroy Says:

    Informative post as always, thanks. It would be amazing if you could work on an Elliot Wave count from a 15 or 20 year point of view. I mean where would this major wave that just finished fit in the grand scheme of things

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  16. funtwo Says:

    Thanks to your studies, I felt it would be a trend day, gap too large to fill. But, it stayed flat so long, I didn’t get in until late. Mistake. Futures are down this a.m., hoping for a gap fill so I can short. Yelnick, EWI, and Neely say that was 1 up on the way to DJI 10,000ish.

  17. Corey Rosenbloom Says:

    Castor,

    Thanks! I’m not an expert Elliottician, but I think the general consensus is that we completed a supercycle (or grand supercycle) wave III into 2000 and what we’re having now is an Expanded Flat ABC Correction. According to this count, a final 5th wave up is expected.

    However, an alternate count is that 2000 marked a (Grand) Supercycle Wave V meaning we’re now in a large-scale ABC of supercycle degree.

    I tend to lean towards the first interpretation – that we Completed III in 2000 and are now in an ABC IV.

  18. Corey Rosenbloom Says:

    Vijay,

    What do you mean by ‘one leg of downside at 667?’

    I take it you mean that Wave 4 was a triangle and the breakdown into the March Lows was fractal Wave 1 of (5)?

  19. Corey Rosenbloom Says:

    Fun,

    Trend days often start with a gap that doesn’t fill then price consolidates through the ‘lunch doldrums’ and then has a ‘make or break’ breakout move after lunch time ends. I think the best odds come with an afternoon breakout – it’s then that we have so much data behind us for the day.

  20. Mark Says:

    SPX falls all the way back down to 806 today, just a few handles away from the break-out level that got the rally going on Monday after 2:30pm. Wonder if we’ll get a “failure” here and still have a 5 to go on the downside.

  21. Corey Rosenbloom Says:

    Mark,

    That would leave my head spinning violently!

    We already had a bull trap at the start of January. Could happen again. Depends on Obama tonight. Something tells me they’ve figured out how to ’speak’ to the market to make it rise. My level was 805 as the line in the sand. I’m bullish above it and bearish beneath it.

    It sure does ‘feel’ like we need one more swing down but we can’t pin our hopes on it happening, particularly if price gaps up strongly tomorrow.

    We sure are at key levels, though. The market loves to tease us with this “I’m at 805, oh no I’m beneath it; no I’m above it… no, now I’m at it” routine.

  22. Mark Says:

    Corey,

    It certainly appears as though we just saw an (A) wave down from roughly 821 in the ES on Wednesday’s close into this morning’s second low (after the opening) around 805.50 before heading up for the late morning in an a-b-c (B), before selling off the entire rest of the late-afternoon in a (C) wave that took out the opening lows of the day.

    Wave 4 is all the way back down around 792.50
    Hmmmm…

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