Swing Trading Strategies & Stock Picks Since 2003

Friday gave us yet another “Trend Day Down” in the market - making two in a row - but there’s something quite interesting you need to review about Friday’s Trend Day action.

DIA 5-min:

Do you know what it is without looking?

At 1:00pm, all short stops were triggered, knocking trend-day traders out of their positions (unless they used wide stops) before reversing back down through support immediately into new intraday lows, officially confirming (and springing) a Bull Trap.  Let’s take it step-by-step.

The day actually opened on an upside gap, which gave a low probability of a trend day (down) developing.  However, the gap was quickly (instantly) filled and price then broke sharply to new lows with a large red bar.  Price skirted lower and we registered a new momentum low, signaling that we should short the first pullback to the 20 EMA when it came.

It actually didn’t (officially) come at 11:00, as price failed to muster enough strength to test the EMA though a bear blag did develop and price broke down out of the flag to new intraday lows at 11:30.  We should have been suspecting a trend day was developing at this point because of the positioning of the key EMAs.

Price did form a positive momentum divergence, taking us all the way up to the falling 50 EMA and knocking out any stop-losses placed by the sellers - easy come easy go.  If trading were easy, everyone would be doing it!  You were right to take a stop-loss there, but not right to buy (wait for the EMAs to cross ‘bullishly’ before buying).

Price then plunged over the next hour to new lows, leaving bears scratching their heads as to why they were just stopped out and price plunged to a new low.  It’s an example of either choosing to use wider stops, thus opening yourself up to larger losses, or tighter stops which prevents large losses but also decreases your win ratio.  One could have an entire discussion on this topic alone - it’s up to us to make the choice.

After making new lows at 1:30, price retraced into an ABC pattern that resembled a Bull Flag that took price back to the falling 50 EMA, nipping above by a few pennies.  You should have noticed the doji or indecision candle that formed at resistance, along with the long upper shadows and taken that as a clue price might be about to make a new run to the downside and indeed it did.  Price made new lows on the next downswing into 3:30 before reversing in a counter-move back up.

If felt like the bulls were giving it their all throughout the day but they kept falling short.  It also looks like we’re heading down in a fresh downswing on the daily charts (and weekly as well).

Continue to study this day for additional insights so you can recognize the patterns and act on them in real time.