Zero in on Tuesday’s Action

Mar 12, 2008: 12:43 AM CST

Let’s look at the 5-minute chart of the price action in the stock market during yesterday’s trend day:

The initial gap was about a 200 Dow point ($2.00 DIA) gap, meaning odds were strongly against a full gap fade, and actually favored that a trend day was setting up.

Even still, the first trade is always to fill the gap. If your stop gets taken out, so be it. In this case, we were playing only for a 50% retracement, which actually reversed near the penny (intraday price lows) for a maximum target for the fade play.

Taking profits at this level (right at 12:00 EST), you could have aggressively put on a long (buy) trade to target a minimum of the intraday price high (gap high).

Price formed another swing low to form a type of double bottom, confirmed by a positive momentum divergence. Also, at this time, Dr. Steenbarger noted a more pronounced divergence occurred with the NYSE TICK indicator, as the indicator failed to make new lows (by making a visible higher low) when the market tested this support zone. Check out his chart for a different perspective.

Price then rejected this low and formed a new swing high, which (omitting the initial impulse caused by the gap) formed a new momentum high. The fact that price shifted to crest above the key moving averages should have clued you in to shift trades to the long side, or exit any existing intraday short you may have been holding.

Where was the highest probability trade of the day? That answer is arguable, but I would suggest that one of the highest probability, lowest risk trades came at 2:00 EST with what Linda Raschke and others would call a “First Cross Buy” trade, and what I would consider an “Impulse Buy” style trade.

Notice the red arrow where I wrote the word “Cross” at the bottom of the chart, which highlights when then red ‘trend’ line crossed zero. The first pullback in the black line of the indicator to the red trend line often signals this high probability trade, which corresponded very nicely with the rising 20 period moving average (which was comfortably above the 50 period at that time). Your stop would be placed just beneath the rising 50 period moving average, and you could have played for a larger target due to the structure of the potential trend day expectation.

Sure enough, holding that trade would have been the best strategy (of course it’s easier to see that in hindsight), and exiting at the close. I exited early, believing we would have resistance or at least consolidation at the Dow 12,100 level (DIA $121.00), but we can win every penny of each trade we enter.

The large price spike at the close signified either that traders were not willing to hold the market short overnight, or were wanting to hold short, anticipating some sort of overnight gap (probably it was a combination of both).

By the way, the Financials (sector) had the largest percentage gain today at just over 6.5%, followed by the Materials and – of course – Energy as Oil topped $108 per barrel. The only industry to suffer today was Health Care (not shown) which declined less than 0.2%.

Tomorrow should be interesting, but I’d almost guarantee it won’t be as stellar (400 point move) as today’s move. Some sort of consolidation may be ahead, but then again this large move may have a bit more steam in the next few days. I’d watch out if I were short and might speculate if I wanted to get long here.

Comments Off on Zero in on Tuesday’s Action

Comments are closed.