Trend Day Up – Market is a Broken Record in Reverse

Jan 14, 2008: 6:37 PM CST

I wonder when this market will ever gets its head on straight again or regain its footing, whether up or down.

Typically, trend day ups do not follow a trend day down. Often, following any sort of trend day, price consolidates or can even trend a second day in the same direction. Rarely do you have the pattern we just experienced in the US Stock market.

Nevertheless, today was another classic trend day, but in the upwards direction:

Recall that early indicators of a trend day include increased volume, increased range expansion (especially of the first fifteen minute bar in relation to the previous 7 days’ opening 15 minute bar), gap or impulse, high breadth readings, etc.

Today, following a pronounced momentum divergence on the 5-minute charts, we saw a large impulse gap in the US Indexes.

#1 The first “trade” or play is to Fade the Gap and try to short the market to play the reaction against the initial impulse. Usually, the gap (also known as “windows” in Eastern circles) closes at least 50% and more than not, will close 100% (retrace all the way to yesterday’s close).

I always try to fad any Index gap that is less than 100 Dow Points. If I am stopped out, or the trade falters at the 50% retracement, I know that we have a true momentum impulse on hand and the odds then shift majorly that price will continue to trade/trend in the direction of the original gap.

That happened flawlessly today.

When you expect a trend day, put on a core position and buy pullbacks to key moving averages. NEVER FADE A TREND DAY.

I have circled key trades you could have made within the structure of the 20 and 50 period moving averages.

When you detect a trend day early, be courageous and bold and use a bit of leverage if need be. Often, you’ll make the most money for your month if you aggressively trade trend days.

Conversely, you’ll lose perhaps weeks worth of profits if you continuously fade a trend day. Do you see any opportunities to ‘get short’ other than the initial opening gap? There are some, but they’re extremely risky and offer very little reward.

Your timing would need to be virtually perfect and your reflexes intensely sharp, given that this is the 5-minute chart.

Why not trade simply and effortlessly in the direction of the trend? That way, even if you’re initially wrong (price trades against you), the odds still favor higher prices yet to come, and in this case, they do.

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