Tuesday, January 20, 2009

Six Ways to Identify a Trend Day in the Stock Market

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).



E-Mini Player said...

Very good points Brett! I've made some very detailed posts on using the NYSE TICK and VIX on my Blog; accompanied with a lot of screen shots taken in real-time. Would love to hear your thoughts on my approach if you have some time to discuss. Btw, I'm in Chicago; not too far from you.

ShortBus said...

Yes these are very good points. I use almost none of them, except possibly 3 and 4.

I will have to see if my trading platform supports any of the others.

GS751 said...

Excellent Post.

Joslin Lolo said...

Another excellent post...I assume the converse is true in an up-trend ...any chance you could write this up?

Brett Steenbarger, Ph.D. said...

Thanks e-Mini Player; do pass along URLs for blog posts that might be of particular interest and relevance to TraderFeed readers!


Brett Steenbarger, Ph.D. said...

Hi Joslin Lolo,

The uptrend criteria indeed reflect the converse of the criteria in the current post. If I get a particularly good occasion, I'll illustrate. Thanks--


Matthew said...

Today was a definite downtrend day. However it was a big "news" day and was choppy in the morning, so I got short much later than I normally would and left a lot of potential profits on the table.

Sometimes, the day job just gets in the way. . . :-)

On the positive side, I closed out the day with a new maximum high water mark in my trading account.

E-Mini Player said...

Here's a post I made on last Friday's gap and go session discussing how we may be able to identify gap fill days and gap and go days: http://eminiplayer.blogspot.com/2009/02/friday-020609-gap-and-go.html

I believe this could also be used for trend/non-trend days.

BalaB said...

Thanks Dr. S!

One of my major hurdles is being able to morph a current position from an opening session Scalp and into a directional ride. Granted this requires an obvious re-sizing (i.e. downsizing) of the position but being able to recognize a trending day from an opening thrust is something I need to improve upon.

Can't thank you enough for all the fantastic information you post.