Trading Today’s Large Trend Day

Jun 26, 2008: 7:40 PM CST

After forming two seim-dojis in a row (indicating relative indecision), the market unveiled a pure trend day today, allowing quick and steady profits for those who were ready to trade it for all it was worth.

How might you have traded today’s trend day? Let’s look.

The odds were slightly higher that a trend day could occur, given the two prior candle patterns (not shown) which signaled indecision.  Also, the market tends to consolidate prior to a “Fed Day” announcement and then trend following this consolidation.

To be honest, I expected the trend day to trade upwards, as the Dow tested the prior lows after an oversold condition, but that was not the case – it’s far easier to anticipate a trend day, and more difficult to predict in which direction it will occur.  As intraday traders, it’s sometimes better to come into the trading day with an open mind and then play the situation as it happens.

In most cases (this being no exception) a trend day is preceded by a range contraction day and then opens with an opening gap that refuses to fill.  In this case, if the “gap fade” trade gave you no satisfaction, odds are that the day’s action will unfold in a true trend day, meaning virtually any (short) position you take will be profitable, as the price is expected to close on the day’s lows.

The moment you decide that a trend day might be developing, establish a “core” position and then trade swing scalps on any retracement to the falling 20 period EMA.  Place your stops above the falling 50 period EMA – I always use the 5-minute chart.

Because of the structure of the day, feel free to use leverage on entering during the retracements and play for small, high probability targets with a larger position for added profits.

For reference, the chart of the SPY (S&P 500) was almost identical to the DIA:

Trend days occur relatively rarely, but they can offer outsized profits if you’re aware of the structure and how to take advantage of the price behavior with confidence.

Study today’s action for your own insights and clues as to what you could have done better, so that you can take advantage of the developing structure in real time.

(Hint, I make no reference in the post to breadth, TICK, TRIN, $VIX, sectors, volume – all of which can be used to raise your confidence that the day’s action will unfold in a true trend day)

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