Trading the Strong Trend Day Down on Thursday

Jan 29, 2009: 10:12 PM CST

Thursday’s price action gave us yet another excellent example of a trend day, which offers us the opportunity to trade any retracement aggressively.  Let’s look at the structure and key high probability trade set-ups that formed.

DIA 5-min:

DIA 5 min chart

The day started just as Wednesday did with a large (greater than $1.00) overnight gap.  For the 100th time, it is generally not a good idea to try to fade a DIA gap greater than $1.00 as today’s (and yesterday’s) structure shows.

In such a situation, you should be waiting to sell the first pullback into key resistance for your first major trade of the day.  That occurred around 11:00am as price pulled back to confluence resistance via the falling 20 and 50 EMAs.

Price then went to new lows into noon and formed a Bear Flag into confluence resistance at the 20 EMA and 200 SMA – I labeled this the Highest Probability (or Best Setup) of the Day.  Note the risk-reward inherent in this trade.  If you expected a flag here (as it unfolded), you had a very tight stop (just above the confluence zone) to target a Measured Move of the prior swing from $82.80 to $82.20 (roughly $0.60) which unfolded perfectly as price moved to new lows on the day at 1:00 – this was also your exit as the measured move target was complete.

Price then staggered on the day’s lows and made one more flag-like retracement to the 50 EMA which set up another opportunity to enter short to target a test of the intraday lows.  The next swing took price down to new lows as the market closed very close to the absolute lows on the day – a bearish development that erased all the gains of yesterday’s bullish action.

If we break lower tomorrow, it will likely set-up yet another Bull Trap, meaning we would be almost certain to test our November lows.  Study the price action for more clues and use today’s example as a great reference for how an ideal trend day should unfold.

Corey Rosenbloom
Afraid to Trade.com

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Comments
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  • DaveB

    I want to follow-up on the Dow-Mini's and profits from the measured move discussion.

    If you're not up to speed on futures trading another way to play this would be to do analysis on DIA but trade with DDM (which is like a 2x DIA), or trade one of the 3x ETFs. That could make the profit a little more worthwhile.

    I rarely day trade because I'm a rookie who is working with a small account size. (I don't dare put more money in until I can prove to myself that I know what the heck I'm doing!) I try to look for larger multi-day moves, because these smaller intraday moves aren't going to make enough money to bother with. Plus, if you make more than 4 day trades in a week you can be classified as a pattern day trader and that requires you to have a 25k account balance. So if you're working with a smaller account you have to keep your day trades to a minimum or else you could get a slap on the wrist.

    Does anyone have any recommendations as to where I can learn more about mini futures? Would I be able to trade those in my regular schwab brokerage account or do I need to set up an account with someone else? Thanks!

  • Don-Da-Mon

    Inverted Hammer can be a bullish pattern, can't it? As I look back at the S&P Weekly over the last year, after an inverted hammer there was a move upward. If retesting the bottom wasn't also in view, I'd think we were going to move upward.

  • Matthew C.

    Hi Corey.

    I set up a TOS account near the end of November. Since then I've been using their simulated trading feature to trade only trending days. The simulated account started with $100K, I just closed out January at $240K.

    I've been pretty aggressive and made some pretty bonehead stupid moves along the way. My best day was 60K, worst was -30K (don't ask how I managed to lose that much!)

    I'm actually using the maximum of 16 contracts once a trend day has proven itself for real. I'm even adding on SKF or SSO in $250K-300K size in addition to the futures contracts once I've maxed out TOS's 16 contracts.

    The key is, of course, that you have to have a maximum trade loss point and stick to it (my two 20-30K losses came from not respecting my hard final stop and moving it back when hoping for a reversal).

    Of course, this is extremely aggressive trading. But I only put any size on in trend days, so I need to take advantage of the trends that do happen. Maybe I'll tackle range bound trading later, but for now I have something that is working.

    I figure I'll wait a year or so to actually start trading real coin, once I make sure that I am profitable every month.

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