Wednesday’s Trend Day Down with Flags

Jan 7, 2009: 5:18 PM CST

Wednesday gave us a clean “Trend Day Down” example that will serve as a good reference to a classic “Trend Day.”  Let’s look at the DIA and notice moving average structure, bear flags, and the trend move.

DIA 5-min Chart:

The first clue that we might have a trend day in price was the large-scale opening gap of roughly $1.25.  Testing shows it’s best not to try to fade a DIA gap greater than $1.00, though there’s often a push into the gap area as we saw today.  If price makes new lows after a retracement agaisnt a downside gap, odds then greatly favor that the day will unfold as a trend day and that aggressive tactics might be used.

The first ‘ideal trade’ that formed was just shy of Noon EST when price ‘wedged’ its way into a sort of flag – though clearly not an ideal flag – pattern into the resistance of the 20 period EMA.  A stop should have been placed above the falling 50 EMA.  Oh, once you suspect we have a trend day unfolding, it’s best to enter a core position and trail a stop above the 50 EMA and exit at the close.

Price breached the 20 EMA but did not test the falling 50, and price actually challenged the 20 EMA several times (providing new entry signals) until new lows were made on the day at 2:00 (patience is also important in trading trend days).

Price careened to new lows and formed a flag-style measured move (which failed to achieve its ‘new lows’ target) around 3:30.  Notice the high probability, low risk entry as price retraced quickly to the falling 20, formed an evening star bearish candle, and then began to fall into new lows.  The next to last bar of the day unexpectedly foiled the bear flag trade and sent price back above the 20 EMA – I suspect that bar left many traders scratching their heads.

I continue to remind you to throw away oscillators on Trend Days – that includes Stochastics and RSI.  Even the 3/10 Oscillator (which I find most useful for momentum highs/lows and divergences) signaled many false signals and should have been ignored all day (otherwise you would have been constantly fading the trend move down due to the multiple false-positive divergence signals that formed).

In a trend day, rely on the 20 and 50 EMAs – or at least that’s my advice from my experience.

Continue to study today’s price action for additional clues.

Corey Rosenbloom
Afraid to Trade.com

12 Comments

12 Responses to “Wednesday’s Trend Day Down with Flags”

  1. J Says:

    Corey: Would you please illustrate the false signals given by Stochastics and RSI in your example today? Thank you very much.

  2. John Erard Says:

    Thank you Corey … as always you provide fabulous content.

    Between you and me the SoH shold be 1/2 as good and helpful as your comments are.

    SoH is all about Tim. You are all about helping us newbies that know enough to lose our capital.

    Thank you again, and please do not hesitate to let me know if I can help you to make your site the most referenced on the web.

    John Erard

  3. svet Says:

    Corey, can you comment on using sma vs. ema? For example, the daily sma chart on the s&p tells a different story than the ema chart (I believe we are above the 50-day as of the close on the sma but below on the ema). Thanks

  4. Gawed Says:

    Great content is my opinion also like above. It’s so well put for newbies!

    i also would like to know pros and cons of EMA and SMA!
    and also about ignoring indicators.. at what time of the day do you come to the definite conclusions we’re trending and discarding them?

    thanks! keep it up 🙂

  5. chartsandcoffee Says:

    Corey,

    Nice charts. Your work is appreciated.

  6. Corey Rosenbloom Says:

    John,

    Thank you so much for your kind comments! I’m glad to be of assistance and am thankful for all support.

    I fall behind in reading other blogs so I need to start doing that more I guess – there’s only so much time in the day.

  7. Corey Rosenbloom Says:

    Svet,

    I need to make a post comparing/contrasting the differences. In short, EMAs ‘hug’ the recent price better; SMAs are more smooth; EMAs react faster than SMAs.

    You have to pick one and stick with it – no need in flipping back and forth. I’m not saying EMAs are the best way to go for everyone but they’re what work for me in my work and tag price – to my liking – better than SMAs.

  8. Corey Rosenbloom Says:

    Hey Gawed!

    You’ve both inspired me to post on EMAs and SMAs. I’ll have that post soon – please remind me if a little time goes by and it slips my mind.

    We get clues as the day progresses that odds favor it will be a trend day than not. We should assume the day is NOT a trend day until proven otherwise through clues. Usually you’ll know by noon EST.

    Odds favor a trend day when there’s big news expected that could dominate the day.

    Odds favor it when a large overnight gap occurs that is NOT filled.

    Odds favor it when the EMA structure is in the most bearish orientation possible.

    Odds favor it when the EMAs hold their first resistance and perhaps we have new momentum lows (or highs) and also above average volume.

    There’s no magic method – just probability. Wish there was something magic to tell us but I haven’t found it – it’s just piecing together a puzzle and making a case.

  9. Corey Rosenbloom Says:

    Charts,

    Thanks for reading!

    I’m looking forward to reading more on your site. Keep up the good work!

  10. Anthony Says:

    Hi Corey,
    I found your site after it was referenced by traders/mentors on the Advanced Get trading blog. Your posts are very informative & a absolute joy to read. Thank you for taking the time to share your observations with us.
    Anthony

  11. Corey Rosenbloom Says:

    Thanks Anthony!

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