Stocks are down sharply this morning.Friday’s action told us to look for a selloff and told us it could be big; let’s take a look at the chart.
Looking at the chart, I drew a line to momentum.I look at two period momentum to look for a directional bias for swing trading.I look for a peak or a trough in momentum to signal a short term trend change.Friday’s high in momentum signaled that we should be expecting a momentum sell short day today.On a momentum sell short day we look for the market to open near the high of the session and sell off over the course of the session, closing lower that where it opened.This tells us to be looking to sell early in the day, and to expect a downside bias over the course of the session.
S&Ps had the potential for a big move today.Friday’s session had the narrowest range of the previous four sessions.The narrow range pattern tells us to expect a directional, breakout move.Narrow range days are a sign of indecision, as neither side wants to commit to the market.They often result in breakout days.On breakout days, we look for a market to breach close in support or resistance, and extend the move over the course of the session.On breakout days, market moves can be self-reinforcing, gaining strength as they go, as more losers bail out and momentum traders pile in.
Today has been a good example of breakout day action.A potential downside breakout point would have been Friday’s low of 910.75 (which was also roughly the midpoint of the Weds/Fri. range).I developed my other advisory, Trade or Fade, to trade these moves; the Trade or Fade breakout point was 907.00
Once short, my first profit target was Wednesday’s low at 899.25.The first Trade or Fade profit target was also there at 899.44. Held trade under 899.25 should extend the selloff, with next profit targets at 894.27 (the 200 day SMA) and the second Trade or Fade target at 889.27.
Breakout day and momentum sell short day
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