The Most Perfect Trend Day Ever

Jan 2, 2009: 7:07 PM CST

Ok, maybe not “ever,” but today’s intraday DIA price action comes as close to an “idealized” or perfect trend day example as you can find.  Without further delay, let’s see the stable price action that made up the day.

DIA 5-min January 2, 2009:

The day began as many classic trend days do – with an overnight gap that (technically) did not fill.  An un-filled gap is your first clue that a trend day may be upon us.

An initial retracement occurred to the 50 EMA which was quickly reversed at support before rocketing to new intraday highs at 11:00am.  Price then ‘flatlined” for the next hour, experiencing a correction “by time” to the rising 20 EMA, finding support, forming a hammer, and rallying again sharply off EMA support.

Price then retraced one more time back to the rising 20 EMA before rising higher again.  Like a broken record, the market retraced one final time to find support at 3:00pm to rally into the close… which was unfortunately marred by a large down-bar into $90.20… which means the Dow is now officially above 9,000.

I reiterate – on a suspected Trend Day, eliminate all indicators except moving averages.  Oscillators (in an up-day) will always be flashing “sell” due to ‘overbought’ conditions and even the 3/10 Oscillator (shown above) will flash multiple false negative momentum divergences that must be ignored.

I have found consistently that the 20 period EMA in conjunction with the 50 EMA provides the best combination of moving average analysis for trend days, in terms of support, risk-management, and additional trade entries (on retracements to these averages).

Today’s price action may have taken many by surprise, but it is what it is and – perhaps in part – was so strong due to the overt bearishness out there.  Perhaps a good deal of the move up today was on the backs of bears being stopped out.  We’ll soon know whether this move continues, showing signs of additional strength, or reverses which will prove only to be an insidious bull trap.

Keep watching this closely!

Corey Rosenbloom
Afraid to Trade.com

28 Comments

28 Responses to “The Most Perfect Trend Day Ever”

  1. Anonymous Says:

    “…unfortunately marred by a large down-bar into $90.20”

    That down bar made my day…Corey, what is so “unfortunate” about it??? …just kidding man. Good point that this day probably caught many by surprise…I spent most of it trying to scalp pullbacks, unsuccessfully, until that big down bar you find displeasing. It was a hard trade to make after the string of losers but I thought after the surprisingly strong price action of late, and the fact it was a friday, I went for it…and now, thankfully, my weekend will contain a little less self-criticizing.

    Great blog BTW…

  2. dacian Says:

    I know the holiday is not finished, but the volumes aren’t great at that cross of prices above 20 and 50DMA. We need some volume next week to confirm prices can hold above the moving averages. Otherwise, this trend won’t confirm in my opinion. What do u think?

  3. Corey Rosenbloom Says:

    Anon,

    How in the world did that bar make your day? 🙂

    That’s the one hallmark of a trend day that – to me at least – is incontrovertible. Never trade against a trend day no matter what. Odds overwhelmingly favor the trend day pricing continuing because of the supply/demand imbalance.

    I did a quick unscientific count and found that there were about 42 ‘up’ bars and 26 down bars with probably 5 or so ‘doji’ bars. Despite this imbalance, the up bars were consistently larger than the down bars with few exceptions.

    From an edge standpoint – as hard as it may seem – you should never short anything in an up-trend day. You should only buy retracements.

    Profiting from going short may be rewarding but it was against the trend and the odds and was far more work than if you just let the current carry you.

  4. Corey Rosenbloom Says:

    Dacian,

    I’m thinking these resistance breaches are occurring *because* of the low holiday volume.

    Meaning, it almost feels like the bears have taken a vacation but the bulls are sort of slyly pushing the ball without opposition. And that when the bears return, they’ll say “Oh, look – a better price to short” and then drop the price. It almost feels like the “bulls are getting away with it” but you’re right. That’s why next week will be so important.

    Did the bulls pull a sneak attack that will put bears on defensive, forcing more short-covering… or will the bears just make this strength into a nasty bull-trap?

  5. Anonymous Says:

    Corey, your active blog is a boon for us all, as it makes us think and helps us discover the answers for ourselves. Thank you very much!

    As we can see from the charts, the move up is sharp and without any volume, just like it was during the Thanksgiving holiday week.

    The major questions right now are:

    On Monday, will the post holiday week decline behavior after Thanksgiving week be repeated?

    If the rally will continue into Monday and beyond, at what level will the current wave C of fractal 4 end?

    Will the beginning of fractal 5 down be a sharp reversal or a rolling top?

    Is it not true that the question about the next major move down is not of “if” but of “when”?

    Let us all list out any other possible scenarios.

    If we are mentally prepared for all scenarios, then we can quickly recognize the one that the market unfolds for us on Monday.

    We will reevaluate the market after Monday is over.

    What does everyone else think, especially you Corey?

  6. Anonymous Says:

    Corey, it appears that my posting #5 crossed with your postings #3 and #4.

    You have answered some of the questions I had raised.

    Corey, please clear one confusion I have reading your post, relating to terminology. Is it not true that what you call “bull-trap” is pulled out by bulls to trap bears? Is it also not true that some people are used to calling that a “bear-trap”? However, I agree that either way, the rally traps bears like me!

  7. Corey Rosenbloom Says:

    Anon,

    I guess it depends on your perspective and position.

    I’m referring to it as a potential “Bull Trap” because once price crosses key resistance, then it is a classic buy signal, and I suspect many people bought the market on Friday and will do so Monday if price keeps going up. I’m already hearing it on TV “It’s a Bottom!” So Bulls are excitedly buying in.

    However.

    What happens come Monday/Tuesday if the market plunges or Sellers step back in? All the Bulls who just bought will be underwater, and if it’s a significant move down, it will confirm that they are “Trapped” and a good deal of the down move will be their stop-losses being triggered one by one.

    It’s like a trap – crossing above resistance causes bulls to “take the bait” which is fine if price keeps going higher. But if we cross above resistance then fail there, it will be a trap.

    The Bears aren’t being “Trapped” but they are being squeezed, because it now comes down to “How much loss can you stomach before you give up?” It’s a test of nerve now, but by no means a trap for the bears. If price keeps going higher, they’ll be squeezed out but if it plunges here, the bears who will profit will be those who had the strongest stomachs to weather the ‘squeeze.’

  8. Corey Rosenbloom Says:

    Anon,

    Good questions – all of them!

    Quick answers – and I encourage other readers to answer them as well:

    My suspicion is that it will (we had a sharp plunge after T’giving as price sneaked its way higher which was then “checked” by the bears. Could happen again.

    Regarding when will the rally end, I posted a few key levels including EMA resistance and Fibonacci. 960 and 1000 seem key.

    I have no idea what the beginning of wave 5 will look like.

    In regards to the “when not if” question, that’s quite a wide-spread belief right now and it’s so easy to make that assumption and people would be correct to assume it… however, the market has an insane way of proving the majority wrong so although I would expect more downside, I would now be far more careful because “everyone” is expecting it. Just because of that, it might be enough to justify bullishness short-term thanks to contrary opinion.

    You’re right – Monday and probably until Wednesday – will be key. Was it a trap? Will the bears reassert? My thinking is that the bears went and enjoyed their profits for the holidays while the bulls “got away with it.” When Bears return, let’s see if they respond by getting their stop-losses triggered (higher prices) or – perhaps more expectantly – take a fresh swipe and drive index levels lower.

    As Mark Douglas says, Be prepared for Anything!

  9. Anonymous Says:

    Thanks for clarifying the difference between “trap” and “squeeze”. I agree that rallies squeeze the bears. However, a bear can be trapped, even within a rally, due to a sharp pullback down, which then quickly turned around. I agree with your response in posting #3 to the one bar bear. One bar does not a trend make! Inside a trend, a one bar drop may be a bear trap. We must wait for the confirmation of trend reversal.

    I agree that the next week is very important for the tug of war between the bulls and the bears. Let us see if the bulls have been trapped by the holiday week rally. We will know if there is mad rush to the exit door next week. It may happen due to redemptions in Hedge Funds.

  10. dacian Says:

    Prior to holidays, everyone was calling for a Santa rally followed by a drop in later in 2009. That is still happening, so the market didn’t try to prove the majority wrong this time (at least until now): the rally is on.

    EW is one way of answering when prices will top; but it might be the inauguration and the huge stimulus signing the signal to sell (sell the news). There are other calls for SPX topping at 200DMA which is around 1200 I guess.

    Each of these has a probability; I think 1200 for SPX is very difficult to achieve in the environment. Market sentiment is quite good for shorting. I’m looking for VIX dropping below its 200DMA (25-30).

  11. Charles Upton Says:

    Corey, sorry, forgot to include name last time(i am 1st commenter)…I was shorting into small retracements, unsuccessfully, until that last short of the big ugly bar “made my day”. I agree with everything you say about not fighting the current, but some days your attention is just not always 100% on the tape, but you want to trade anyway…that’s one of the big skills I think…knowing when to *not trade*. I probably should have abstained, but where’s the adventure in that…that may be a ‘loose attitude’, but I always take something positive away from all my market experiences…and your blog posts are helping me to do that more effectively…so thanks man.
    -charleS

  12. Corey Rosenbloom Says:

    Charles,

    I never seem to be able to keep up with when Hedge Fund redemption periods are but they indeed can move markets greatly.

    Precisely – big down bars can be bear traps, particularly when they break EMA support. Look at some of my DIA posts last week where price nipped beneath the 20 (or 50) EMA, snagged long stops, triggered short entries only to trap those shorts as price ripped back above support into new intraday highs. Those were traps.

  13. Corey Rosenbloom Says:

    Dacian,

    I actually think the market proved the mass wrong again. People expected a Santa Rally (heard it on TV so much) but it didn’t happen. Now, in light of no Santa Rally, they expect prices to fall but they’re rising currently. Contrast this with many professionals who are saying the market will be falling soon and if the market continues to rally, it will confound them.

    I do think part of the rally is due to expectation of a stimulus and once it materializes, we’ll probably have a pop up and then complete a larger Wave 4 pattern that then will take us to new lows but that’s discussing a little too far into the future for me, who tries to take things one day/one swing at a time.

    I’ll just say that it would surprise me beyond belief to see the SP reach 1200 in the next few months. Not out of the question, but would be very surprising.

  14. Corey Rosenbloom Says:

    Charles,

    It’s not so much knowing when not to trade as when not to trade in a certain direction. It’s fine to abstain but we shouldn’t look to trade one side of the market exclusively.

    Trend days occur perhaps two or three times per month, but when they do, they can devastate traders who do not account for their possibility. Mean reversion (such as you describe) may work 90% of the time but it’s that 10% that can knock out all your gains and more. You really have to be careful on trend days.

    I tend to make the most money – in fact an overwhelming bulk of my monthly profits – on trend days. The rest of the days are low-profit affairs but I take on extra risk and trade aggressively then. It’s those days – and successful execution of them – that make my months. I just sort of scalp around the rest of the time.

  15. Anonymous Says:

    Charles, just admit that you made mistakes shorting, numerous times, the strong, relentless up trend. Don’t feel bad, man, because so did I. If we don’t admit mistakes, and instead try to justify them, for our own ego, we can never learn. Incidentally, I am posting this only to ensure that I follow my own “advice”, at least in the future, because this is not the first time I have been shorting strong up trends. Thanks man!

  16. Anonymous Says:

    Charles, I also shorted the strong uptrend yesterday, numerous times. And this was not the first time. In fact, last year, I would have done pretty good if it were n’t for this bad habit of shorting up trends. The famous saying is, “In bear markets, it is the rallies that can kill”. In fact, some traders had heart attacks the last time there was a powerful rally up from the bottom at S&P 752.

  17. Anonymous Says:

    Corey, the trend believers like you make money because there are trend non-believers. If everyone was a trend believer, who will take the other side?

    Can God, ever possibly, bless us all equally in this zero-sum game?

  18. dacian Says:

    Corey, by “Santa rally” I don’t mean prices will top on 25th of December; but rather there will be a rally everybody was expecting during that period, which it is happening. It can get extended through January very well; bear market rallies usually take between 2 weeks and 3 months, right?

  19. Peter Wagner Says:

    Who cares-Your guessing- If you want to go long buy puts for long positions-Insurance- Or at resistance short stock buy calls! I don’t care and can’t guess like you all try to, which way we are going.

  20. Peter Wagner Says:

    Really stupid-Everyone has an explaination after the fact-Knownone can predict ahead of time. Please tell me ahead of time, like on Wednesday that the market is going to trend on Friday and how far up it’s going? It’s like the dumb Red and Green arrows trying to convince you that these idiots know what they are doing. Please put red and green arrows on a chart for future trades for Feb and March.

  21. Anonymous Says:

    Peter Wagner, is it not better to be an informed “idiot” rather than an uninformed one?

    An informed trader has a better chance than a blind one who depends only on chance.

    However, I agree with you that all positions should be protected by insurance or stop losses because of the nasty surprises.

  22. Corey Rosenbloom Says:

    In regards to the guessing question, trading is nothing more than money management tactics employed over probabilistic edges with objective structure via repeated pattern recognition. Ok maybe it’s more than that but in truth, prediction isn’t as important as edge.

    You can be wrong 90% of the time and still make money provided your winners outsize your losers. The trend day concept provides edge.

    Trading clearly isn’t about being right – it’s about making more statistically when you’re right than when your wrong while deploying a strategy that has objective edge in the marketplace.

    It’s not magic.

  23. Corey Rosenbloom Says:

    Peter,

    Additionally, the purpose of these end-of-day posts is not to show how wonderfully one could have traded.

    It is to show objective trade set-ups in hindsight with the goal being repeated exposure to price patterns and structures so that they become internalized to the point where when they occur again in real time, you act with confidence and trade properly.

    In summary, what I’m doing is the “Teach a Man to Fish for Life” principle vs other sites who “Give You a Fish Today.”

  24. Corey Rosenbloom Says:

    Anon in posts 14, 15, & 16,

    Somehow those got trapped in the spam filter – I just released them.

    Tis an excellent point – this is a zero-sum game. Markets exist because of diversity of opinion. I guess it’s not that people are necessarily wrong or right, but on the right side of price, which is the ultimate arbiter (or “King” if you will). No one’s on the right side of price all the time, and frequently, price will move in such a way to confound the majority.

  25. KKR Says:

    Does the Dow have trade consistently above its 50 day EMA (on a closing basis) from here on to meet the S&P 960/1000 levels ?

    or Will a pull back on the Dow to its 50 day DMA levels (of 8650 or so) be still construed as a BULL TRAP ?

    I am leaning towards the second possibility that there might be a pull back to the 50 day DMA is on the cards before taking off to the 9600/9700 levels.

  26. KKR Says:

    Does the Dow have trade consistently above its 50 day EMA (on a closing basis) from here on to meet the S&P of levels 960/1000 ?

    or Will a pull back on the Dow to its 50 day DMA levels (of 8650 or so) be still construed as a BULL TRAP ?

    Personally, I am leaning towards the second possibility that there might be a pull back to the 50 day DMA before the Dow takes off to the 9600/9700 levels.

    Sorry for repeating this post, but there were some typos that somehow got in in #25

  27. Corey Rosenbloom Says:

    KKR,

    For strength to materialize, I would expect the Dow & other indexes to remain above their 50 EMA or at least the 20 EMA. Failure there would bring bears out strongly.

    A bull trap will be confirmed if price falls beneath these averages and a fresh sell signal is triggered, which is probably where most bulls have their stops (beneath these averages).

    If bulls can support at the averages, and bears hold, then odds would shift to favor higher prices because bears would have to cover and new bulls would be encouraged.

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

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