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