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.”
Afraid to Trade.com