References and Context

Know how to identify trend days?  And, more importantly, do you know when you've been fooled, and it's a "false trend day" - one that starts strong, but loses steam and reverts to the usual grind 'n chop?   In today's trade I will show you some clues to look for, and references to pay attention to.

First, your weak day-timeframe references are:

• the opening print
• settlement
• 1/2 back the range
• 1/2-hr bar highs/lows
• overnight highs/lows
• previous session highs/lows

Money that trades with these references is classified as day or very short in timeframe.  In other words, the weakest type of hands participating in the market: mechanical/automated systems, small day traders, and other ultra-short term scalping money that has little staying power or lasting influence on price.  Identifying their participation was one of the largest takeaways of the 2015 Spring Intensive course.  I'm sharing these concepts because they've only now been made public.

I encourage you to watch the this webinar by Jim Dalton, which thoroughly explains them and provides detailed examples taken from the market, along with slides you can keep for your review.

Now, onto a more recent example from today's S&P trade.  Coming into the market, we see it was 100% long with regard to overnight inventory.  Total overnight volume was about 102k, which is pathetic - the market rallied, yes, but there's just not much holding it up.  Making note of it, I then watched the market open for the day session.

5/1 Activity-based chart

Opening just under the overnight high (1), it looks 1 tick under the open (2), moves up, and then pops right through the overnight high, briefly stalls as some selling hits (likely some profitable longs locking in gains), and then momentum pops again for a 5 point move in less than one minute (3)!

Clearly, the market doesn't care that overnight trade is long; it's rallying anyway.  This is a sign of strength, traders are buying it even at higher prices - the makings of a trend day.  Here's where it gets difficult: often uptrend days don't provide a solid reference to enter, and when they do it could be after much of the rally has already taken place, causing you to buy with the late majority, not the early adopters/innovators who get the best trade location and lion's share of the profits.  There's usually one pullback on the initial pump, however, where it will give back 2-3 points on average.  I chose to use that as my buying opportunity, as you can see on the above chart.  What I'm looking for is upward continuation to validate my trade idea, with the current high being the most visual reference.  You can see the market almost took it out. Almost.  That it didn't builds the case against my momentum-trend go-with-it-now trade idea.  Giving the market a bit of chance (since my stop was at 88.25, the true point of failure), I wanted to see if perhaps the slew of econs hitting at 9:00 were keeping money on the sidelines.  Econs are released; still no conviction to the upside, just sideways churn (4) with tick structure becoming increasingly not-bullish.  And, the B-period low printed just 1 tick above the opening price before bouncing (5).

So, let's recap:

I entered on strength, anticipating a trend day,
the market stalled;
the market went sideways for a half-hour,
the high was not taken out;
and the pullback was to the opening print.

Seeing all of this together, the risk on the trade suddenly went through the roof.   My trend day idea became invalid, thus I had no reason any longer to be in that trade.  Clearly, trade location was no longer ideal either, since these prices weren't being left in the dust of a continuous rally up.  Taking the opportunity to sell into the bounce off the opening print, I exited the trade before I was forced out (which would've eventually occurred). The day started on strength (when I bought), but it continued on into weakness (when I sold to offset).

And sure enough, the market churned sideways for most of the day afterwards.