Trend Day Turned Upside Down

May 15, 2008: 1:03 AM CST

Today’s intraday action began with the promise of another trend day in the market, but ended on a terrible note, reversing the action into the close and causing a cascade off intraday highs for most stocks.

Let’s peek at the action via the DIA (Dow Jones ETF):

Trend days often start with an overnight gap (or in this case, large momentum impulse) which sets the stage for further ‘one-sided’ action.  Typically, once you recognize that conditions favor a trend day developing, you want to establish a ‘core’ position early and then trade around it, typically adding to it (or playing small positions) at subsequently pullbacks (retracements) to the rising 20 period moving average.

The official ‘sell-signal’ for a trend day (to abandon the trend) is when price solidly or convincingly breaks its rising 50 period moving average, which occurred around 3:00pm.  I don’t recommend trying to trade counter (against) trend days.

The NASDAQ (QQQQ) suffered a worse beating than the S&P 500 or the Dow Jones:

After a large volatility move up (and gap), price had one last bit of strength in making new highs before plummeting like a waterfall into the close.  Today’s action showed why it’s important to trade with stops, because if you kept a core trade on (or almost any long position) and walked away unprotected by a stop, you came back shocked to see your profitable trade turn sour… very sour today.

The price action in Google is an example of how horrendously some stocks were slammed today:

After an initial upside gap and successful trading, Google fell from $590 to $576 in just over an hour.

The market is telling us that volatility has not quite left the ‘building,’ and that we should always keep watch over open positions and not get overconfident in the marketplace.

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