Yet Another Trend Day Down

Jul 28, 2008: 3:24 PM CST

The market gave us yet another trend-style day down today, washing away most if not all bullish hopes for an extended counter-rally recovery.  Let’s view the intraday charts to see what opportunities were in store for nimble and aware traders, who were able to take advantage of the trend structure today.

DIA 5-minute chart:

Most trend days begin with two common characteristics:

A low-range day prior (usually a NR7 or a doji pattern)
A (relatively) large opening gap

The last two trend days (the last was the previous Thursday) had slight but not ultra-range contraction, but neither began with a large opening gap.  In fact, both were ‘creeping’ trends, which tend to be the most insidious, hidden style of trend days.  Lack of an opening gap can lull us into complacency as we fail to recognize the potential for the trend day to unfold.  It’s far easier to anticipate a large intrday trend day move if the initial gap occurs (and especially if there’s some sort of major news announcement).

Barring that, we tend to be in ‘countertrend’ or ‘fade’ moves, and deploying such tactics on trend days can be devastating to an account, especially if done in the futures market or on leverage.

Nevertheless, let’s look at today’s structure for trade opportunities and clues.

The day started relatively ‘normal’ and then price broke beneath Friday’s close not necessarily with fanfare or high volume.  Price even was mysterious enough to provide dojis and hammers that lured some of us in to ‘buy long’ anticipating a counter-swing, which led to stop-losses (which likely led to further selling as the ‘bears’ dominated the session almost from open to close).

The only true ‘counter-trend’ move, or retracement, came at noon, and it was a flat-line (correction by time) swing, which precluded further selling pressure ahead.  Sure enough, when price ‘retraced’ back to its 20 period EMA and formed three tight-range doji candles, that was your clearest entry signal for a range expansion move and the position I deem the “highest probability” short of the day.

Price expanded out of this consolidation on to new lows for the day.  If you missed this quick expansion, there wasn’t much left to obtain, as price once again consolidated, formed a positive momentum  divergence… and then plunged lower into the close, invalidating the divergence signal.

Nevertheless, once you recognize that a trend day is forming (or has higher odds of developing than not), you need to enter (in this case short) at that moment and not try to ‘play cute’ with entries.  If it indeed IS a true trend day, price will close on or at the lows, so any initial trade location will (likely) be profitable.  You should place your stop above the 50 period EMA and trail down to the close – exit at the close.

The SPY (S&P 500) looked similar, although price did form deeper and more stable ’swings’ that allowed for more profit.

SPY 5-minute chart:

Notice the bear flag into the close.  Once the trend day was established, price never threatened the 50 period EMA.  The ‘flag’ part of the bear flag here was another high probability entry.  Also, don’t be fooled psychologically by thinking “price can’t go any lower so I really shouldn’t enter short here” because many times price that gets extended – especially into the close – will continue to get over-extended, robbing profits from those who attempted to stand in its way.

Mark today’s action up as a “trend day” and download your charts and annotate them to learn lessons when the next potential trend day is upon us.

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