Trend Day turned Rounded Reversal

Jan 8, 2009: 9:57 PM CST

What’s the difference between a Trend Day and a Rounded Reversal?  Today’s price action give you an excellent example.  Let’s see the intraday DIA and see how this structure played out and how you could have managed risk.

DIA 5-min chart:

The day started with a large-scale overnight gap of roughly $0.90.  That’s just at the threshold of “Do I fade the Gap or Not?”  Today’s gap did not fill, though there was a push into the gap shortly after 10:00am.

At 11:00am as price tested resistance, it was an ‘iffy’ position, but when price broke back down through the rising 20 EMA, odds then favored that we had a “Trend Day Down” on our hands.  Keep in mind that it’s relatively rare to get two back-to-back Trend Days and yesterday’s action was clearly a Trend Day Down.

That being said, one could have taken a short-sell as price tested the falling 50 EMA at 11:00 with a tight stop and tried to target new intraday lows.  Price ultimately challenged though not exceeded the lows of $86.60 at noon before forming an “ABC” or mini-bull flag that quickly met its target at the falling 50 EMA (I would not have suggested trading this bull flag, but merely to note its occurrence in the structure).

The second red arrow represents another high-probability, low risk short-sellt rade entry that met its target objective – a retest of the intraday lows.  Notice at this point that there was a triple-swing positive momentum divergence building under price, but even still it’s best to ignore all oscillators and focus only on the EMAs when we have a trend day unfolding, as all signs seemed to indicate as late as 2:00pm.

I highlighted and placed a “1” to call your attention to the 2:00 structure.  That was a decent short-sell entry again, with a stop placed above the falling 50 EMA… however it was quickly stopped out, as were any core positions which was an early sign ‘something might be up.’

The opponent or ‘rival’ structure of a “Trend Day” is a “Rounded Reversal” Day – and no, to my knowledge, there’s no magic formula or indicator that can tell you when the day will be a Rounded Reversal or a true Trend Day.

Unfortunately (for short-sellers), the day wound up being a Rounded Reversal.  Price broke EMA resistance just after 2:00pm then swung down to form a higher low… that was a signal to remain on the sidelines and let price prove itself in terms of which direction to go.

Price broke back above the EMAs and formed a higher high which officially reversed the chart’s trend to the upside.  At that point, you should have been looking for a pullback entry to ‘get long,’ which occurred around 3:15pm where I have the second highlight and the #2.  Notice this is the “Cradle Trade” or Confluence Support coming in from the 20 and 50 EMAs and a high probabiliy, low-risk (stop placed beneath the EMAs) long entry.

This is where the battle between “Loose Stops” and “Tight Stops” rages.  Traders taking this same trade who employed Loose Stops were able to hold their position and achieve a retest of the prior swing high into the close while those who employed a tight-stop strategy most likely were stopped out prematurely.  I’ll let you decide for yourself as to the trade-off in terms of overall system performance and your own money/risk mangement, but chalk this experience up to support the “Loose Stop” traders.

Today’s trading served as an example how we must let price action dictate our behavior, and not let our bias dictate our behavior (as in shorting any rally after 3:00).  Price gives clues from an edge standpoint in regards to the most probable direction, but we still deal in a probabilistic environment without certainties.

Let today’s trading day be a lesson and dig a little deeper into the action for additional insights.

Corey Rosenbloom
Afraid to Trade.com

18 Comments

18 Responses to “Trend Day turned Rounded Reversal”

  1. NotAfraidofTrend Says:

    Corey, Thanks for your excellent interpretation of today’s price action. However, I have some questions.

    Can we be sure that it was a “reversal”? IMHO, it does not even qualify as a decent retracement. The market had the whole day to retrace the big move down of yesterday, but it did not retrace even the Fibonnaci’s ratio of 0.382. If the retracement is so poor, can we not expect that there is a greater probability of the down move to continue.

    Right now, we are facing a commonly faced dilemma. Was the big down move yesterday a retracement of the Santa rally or was the big down move of yesterday beginning of a new powerful move down?

    Please let us know which way you think is more probable?

    Thanks!

  2. NotAfraidofTrend Says:

    Corey the huge gap up on Monday was quickly filled. Then the market did a retest of the high. The retest failed miserably as it did not even make it to the high.

    So, it is quite possible that yesterday’s down move was the beginning of wave 5 or fractal 5 of 3.

    Alternatively, wave 4 or fractal 4 of wave 3, still has some steam left and the market will make another leg up.

    What do you think?

  3. NotAfraidofTrend Says:

    Sorry, the huge gap up was on Tuesday and it had all the makings of an Exhaustion Gap, i.e. end of rally!

  4. Matt Says:

    Excellent analysis Corey.

    Matt

  5. Corey Rosenbloom Says:

    Not Afraid,

    When I use the words “Trend Day” and “Rounded Reversal” in an intraday sense, I only refer to them in the context of the particular intraday. The Rounded Reversal is confirmed because price made lower lows lower highs, shifted, then made higher highs and higher lows. A trend day would be a full series of lower lows and lower highs. These are sort of like the daily terms used in Market Profile to describe a particular day’s action (Double Distribution Day, Normal Day, etc).

    In regards to what’s up next, we’re sitting at critical levels. There’s confluence support right at these levels, and we’re holding the 50 day EMA. Should we fail at these levels, odds would overwhelmingly favor a test or breaking of the November 08 lows… but we’re not there yet. Price has an insane balance on the cliff right now but I expect an impulse move one way or the other. It’s hard to know which way but easier to know that a decent sized move is perhaps days away.

  6. Corey Rosenbloom Says:

    NotAfraid,

    We’re back to the “Which Wave 4 Are We In” debate which we should be having. I side with the “Fractal 4 of Large Scale 3 of Major C” Wave crowd, meaning we’ll need to – at some point soon – test or break the November lows before we get our big move up but again I try to take trading and analysis day by day.

    Again, if we break beneath the 50 day EMA, it will confirm a massive Bull Trap and will likely send prices down to test/exceed the Nov lows. However, there’s a good chance support will hold and maybe there’s more steam in this fractal 4.

  7. Corey Rosenbloom Says:

    Thanks Matt!

  8. chartsandcoffee Says:

    Anybody playing KOL? I think this could be a good play from the long side if you can catch it at about 16. I’ve got a chart up on my blog for those interested.

  9. Anonymous Says:

    Robert McHugh, a great technical analyst that I follow, thinks we are most likely still in 4 up fwiw. I know it’s hard to believe, but with all this stimulus from the government, we should be able to push up to 1000+. I’m looking to play the long side into options expiration next week. Some of the solars sure are catching a great bid lately.

    I’m absolutely licking my chops at the idea of scaling into puts if/when we get above SPX 1000.

    Great post Corey.

  10. toad37 Says:

    that was me Corey, sorry, forgot to plug in my name.

  11. Anonymous Says:

    Tom Bulkowski believes that to March’09 Dow gonna reach 9600

  12. Anonymous Says:

    if we analyse the pattern formed during the last week, we can rather expect today’s behaviour and the high probability of the price to reverse up. Rarely we can see the price going down long without filling the old (not today’s) gap, without at least retesting the local highs IMHO

  13. DaveB Says:

    Anyone notice DXD and SDS with confluence resistance last month? The 20ema crossed under the 50ema in mid-Dec and prices were rejected at this reverse confluence zone shortly thereafter.

  14. Corey Rosenbloom Says:

    Charts,

    KOL – Coal ETF – looks to be developing a good structure. Large scale positive momentum divergence and we’ve reversed the daily trend back to up. EMA support at $15 if it holds.
    Good call!

  15. Corey Rosenbloom Says:

    The Daily Equity Charts look good right now, in terms of the EMA support below and positive divergence – plus a ‘feel’ of bullishness. All of that would be destroyed in one good down-swing, and range has been contracting.

    Does McHugh say we are in the Larger 4 up or the Fractal 4 up of Large 3?

    You’re right about the stimulus. The last stimulus bill popped the market up for a good swing only to have it fall to new lows. We’re due a counterrally – we’re in one – but there is strong overhead resistance particuarly about the 1,000 level. Would most likely be a great place to get short there – a lot of people will likely have the same idea.

  16. Corey Rosenbloom Says:

    Anon,

    If we are in the Large Scale 4, then Dow 9,600 is absolutely a possibility. I need to run the Fibonacci numbers to see confluence resistance like I’ve done on the S&P but I could see that happening if we don’t fail at these levels now.

  17. Corey Rosenbloom Says:

    Dave,

    Good call! I’ll try to point that out in a blog post soon. SDS formed a doji/shooting star at the confluence zone – quite interesting indeed. It then moved to new 2009 lows and then now appears to be testing resistance (of course as the S&P tested support). Looks perhaps easier to interpret on the SDS.

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

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