Thursday’s Trend Day in the Dow and Ford

Jul 24, 2008: 3:37 PM CST

Today’s action gave us yet another “Trend Day,” but it wasn’t your typical trend day for the broader market.  Let’s look at the charts and see what we can learn from the price action.

DIA 5-min chart:

Why was today’s action atypical of a trend day in the indexes?  We lacked a large (or significant) opening gap this morning.  That’s not much of a big deal, but with a gap, we could have had more indication today’s action would indeed ‘fully trend.’

We did have range contraction in the indexes yesterday, and a slight ‘spinning top’ candle formed in the Dow, but that’s often not enough to give full confidence odds favor a trend day – I like to see a doji or price being at some sort of resistance or support, and intraday prices have consolidated.  Trend days can be violent range expansion moves out of equilibrium.

Nevertheless, today’s action will be classified a trend day, but when you noticed this and defined it as such (and began applying appropriate techniques) was up to you.

One thing that was remarkable about today’s action was that of the “Slow Creep” nature of prices.  There really weren’t many “swing oscillations” in price, and price slowly ebbed (or drained) its way lower, preventing clean entries and retracement swings.  As a ‘swing’ intraday trader, I need these to confirm entries – however, the moment I feel odds have shifted enough to classify the day as a trend day, I generally will establish a core position (small) and hold it into the close.  If it is to be a true trend day, initial trade location will not be important, as we expect price to close on the lows of the day.

The blue circled area was your highest probability ‘scalp’ trade of the day, and could have been the position to enter the core trade, but I still would not have expected a trend to unfold at that point.  The moving averages held as resistance, and the averages formed the “most bearish orientation possible,” lending credence to the developing ‘trend day’ hypothesis.

From that point on, sellers quietly, behind the scenes, dominated the buyers until there was a retracement up (two bars) and then a sustained sell-off into the close.  It’s these ‘creeping trends’ that plague both sides of the market:  Sellers cannot find ideal trade location (retracements) to unload (or get short), and buyers keep thinking “well, this must be the bottom.”  Despite the cleanliness of the chart above, the day’s action was difficult to trade because we always like to enter ‘fade’ trades or clean retracements.

Ford Motor Company (F) reported its largest quarterly loss ever:  more than $8 billion.  As expected, the stock was punished by investors in what is deemed a ‘classic’ trend day structure.  Let’s learn from it.

Ford Motor Company (F):

That’s more like it!  The day began with a large (relative) opening gap (greater than 2%) and then provided a counterswing entry, and then flatlined until selling momentum increased after 1:00.  Although price did not close on the lows of the day, it wasn’t far above them.  Volume, not surprisingly, was high today.

Study today’s price action in the indexes and in your favorite stocks for lessons on trend days and appropriate risk management and trading tactics.

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