Recognizing a trend day while it is in progress can lead to a number of home run trades, not least of which is simply selling the market and staying short through the day. Here are a few ways of recognizing a downside trend day in the making, drawing upon today's excellent example:
1) Cumulative NYSE TICK and Cumulative Market Delta start negative and go into a downtrend early in the session;
2) Advance-Decline statistics are skewed from the open, with declining stocks swamping advancers by 2000 or more issues within the first hour of trading;
3) The market opens below its pivot level (average price from the previous trading session), never trades above it, and hits S1 early into the trading session;
4) The market's leading weak sectors going into the day's trade (financial/banking stocks, in this case) continue their weakness and lead the market downward;
5) Multi-bar bounces in the ES (and NYSE TICK) occur at successively lower price highs;
6) Significant buying (NYSE TICK, cumulative Delta, Dow TICK, advance-decline improvement) does not enter the market after taking out S1 and S2.
It is easy to get stopped out of a good trade in a downtrending market; the enhanced volatility ensures that countertrend moves will be uncomfortable. A close inspection of today's chart will show many multi-point countertrend moves during the market's steep fall. Traders who wish to ride the trend need to place stops wide enough to weather these movements. One of my favorite techniques is to look at a prior bounce in the market that occurred at a higher level than the current bounce that I'm selling and place my stop around that level. Sizing your trade so that you won't lose your shirt if you're stopped out (or so that you won't exit the trade prematurely because you can't take the heat) is key to maximizing the home run trade.
Moving forward, I will be posting trend related information during trading days via the Twitter service (free subscription via RSS).
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