Trend Day Down Forming

As mentioned previously, early recognition of a trend day can lead to significant intraday profits, especially if you use leverage or margin.

Today is showing signs so far of some of the conditions that precede trend days.

First, we had the expected release of a major economic report which has been known to shock the market and cause large price swings and prior trend days.

Second, a large downward gap occurred in the major US indexes and some stocks that indicate possible trend days. Recall that the first play is to fade opening gaps, and if they can’t be faded to retest yesterday’s close, odds favor continuation in the original direction of the gap.

You can also look at average volume to see if volume is significantly higher this morning than other mornings, and you can also compare sizes of 15 minute and 30 minute opening bars. Confirmation can also be obtained through the TICK, TRIN, VIX, Breadth, etc.

Let’s drill down first to the one-minute chart (which I never recommend trading) to see the structure at a very tiny level:

Notice the large opening gap. The first ‘instinct’ is to fade this gap but notice how price consolidates beneath key moving averages and eventually breaks below the range, signaling a trade to play on continuation.

Price could never (as of yet) rise above the falling 20 period moving average, which is an ultimate sign of weakness.

In the 5-minute chart, you can see that volume was higher today than yesterday during the morning session, as was the initial range.

Finally, the 30 minute chart shows a crude little bear flag pattern:

Trend days are rare, but lead to greater profit potential due to the price structure and ‘wave’ structure that occurs. It’s often best to avoid overcomplicating the simple structure with complex indicators, and just shorting any pullbacks to key moving averages, as well as establishing a core position the minute you realize we have conditions that favor trend day development, and scalping (or swing-trading) around that core position.