Monday, May 04, 2009

Recognizing a Strong Trend Day in the Stock Market

Here's a tweet from this morning:

9:19 AM CT - We've already hit R3; have to consider uptrend day when u get such pos TICK & hit targets early.

As it turned out, we did indeed register an uptrend day, as we closed near the day's high, up strongly on the day.

These strong trend days offer excellent trading opportunities, as pullbacks generally occur at higher lows, offering entry points for short-term trades through the day (as well as opportunities to hold positions through the day).

Here is a quick checklist of what I look for in a strong trend day:

1) NYSE TICK and Cumulative Market Delta both strong and upward sloping through the day, with a relative absence of significant selling;

2) Lopsided ratio of advancing to declining stocks, suggesting broad market strength;

3) Average or above average trading volume, with volume expanding on moves higher;

4) An early thrust above upside price targets: previous day's high, R1/R2/R3, so that these targets are hit early in the trading session;

5) Dominance of bullish trading themes, such as sector strength among banks/financials and growth-oriented stocks.

As we encounter range days and downtrend days, I'll post checklists for those. I'll also be posting checklist items via Twitter (sign up here for tweets), as real-time alerts for traders.