For day traders and swing traders, a trend day can be the difference between extreme profits and being left behind in the dust; having exited a trade too quickly. Properly identifying a trend day early in the trading session is key to sitting on one's hands and not exiting too soon whether we're trending up and getting out (not fade) if you are short the market.
Well known commodities and futures trader and President of LBRGroup, Inc. Linda Bradford Raschke points out something I feel of note right off the bat: that trend days tend to occur after the market consolidates and digests gains; or what we call a few "inside days":
When a market consolidates, buyers and sellers reach an equilibrium price level — and the trading range tends to narrow. When new information enters the marketplace, the market moves away from this equilibrium point and tries to find a new price, or “value” area. Either longs or shorts will be “trapped” on the wrong side and eventually forced to cover, aggravating the existing supply/demand imbalance.
You'll often hear me in Chat saying "bears are trapped" and it's those shorts on the wrong side of the market, that we will use as "fuel" to send the market trending as they are forced to cover at higher and higher prices.
On the Flexible Grid page after 30 minutes of trading, I monitor market breadth, also known as $TICK , financials ($BKX) and transports ($DJT) for signs of strength and participation. (click chart at right to enlarge)
- A market that gaps up has the best chance of a runaway trend day. Weak shorts are trapped and praying to get out. If the market doesn't run away, weak shorts will cover on gap fill as long as breadth is holding.
- Market breadth ($TICK) skewed above zero after the first 30 minutes of trading for the most part. See the example to the right where it barely dipped below -0- before reversing and heading higher.
- When not in a gap up environment, we can still experience a trend up day or a complete reversal. I like to see transports and banks coming up off of their bottom. The prior days low should be defended (bought).
- Advancers of 65% or more over decliners. This information (see image above) if not available on your trading platform, can also be found on the home page of finviz
- New highs outpacing new lows of 65% or more (also found on finviz). In other words, stocks are trading above the prior days high (not 52 week or all time new highs).
- If I see rejection at yesterdays high, I signal caution however the market may need to build up a little energy before punching though. Think 'ascending triangle' and how they break out.
- I expect a "dip" when London closes. Don't panic or be shook out as it's generally a dip or at the most, a test of VWAP while they close out long day trading positions.
Here is a shot of our trend day, one hour into trading. (left) If you bought the market after 30 minutes in, you're green and shorts are getting worried. Breadth ($TICK) is having a hard time getting below zero and immediately pops back up. Buyers are out in force. Just sit on hands and let it ride. I keep my stop alert (I use alerts and not stops) just below my initial entry for the day. This is when "grid lines" on a chart come in handy.
$BKX and $DJT just keep chugging.
Remember, London has to close and cover their shorts in the next hour. What will they be forced to do if this persists? You got it - cover and that's going to be fuel to help send the market higher.
The end result (right) is a beautiful trend day closing on the highs, and you got in early. Booyah!
Our own StockBuz member, Ryan Romero says that trend days occur 20-25% of the time and he has his own method to identify them:
- After the first 30 minutes of trading, if 70% or greater of stocks are advancing, this is predicting an up-trend day. This information (see image at top) if not available on your trading platform, can also be found on the home page of finviz
- There will be a 30 minute bar close higher (or lower) than the first 30 minute range.
- When looking at a standard 5 min DMI (23 on 3min bars), the +DI and -DI will very rarely cross and certainly shouldnt in the first half of trading. There will be times when it does though. This usually happens after 12 est. and typically will last for about an hour. Any longer, and we must start to look to roll our stops up and be on the look out.
- A trend day higher will close in the top 23% of its range (candle) from the previous close to the current days high. Reverse for downside. To test this just simply take the previous days close, and the highest price point of the day (or lowest if trending down) and run a simple fibonacci retracement.
Seasoned market professional and author Brett Steenbarger utilizes this approach:
- Market breadth on the day stays positive and rising through the session
- The percentage of NYSE stocks trading above their day's VWAP remains above 50% through the session
- The number of NYSE stocks making new daily session highs vs. fresh daily session lows remains positive throughout the session
- Major indexes stay above their opening price ranges throughout the session
Not all of these conditions will fire perfectly on each up-trending occasion, but most of them will. Note that each of the conditions is measuring an initial thrust upward and then sustained buying pressure with consistent, positive breadth. The key is recognizing these conditions relatively early in the trading session.