Congestion pattern at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Congestion (Consolidation)

Congestion is usually referred to as a series of trading days in which no significant change in price occurs. Consolidation is a congestion period that is most like a pause that allows market participants to re-evaluate the market and the environment which leads market price. Upon a breakout of a congested period, a build up of orders outside of the congested area may add to the size of the breakout move. Resolution to a period of indecision or congestion often leads to a run in prices of various sizes. This is in fact a breakout of a congested period. It is important to examine periods of lower volatility when prices become congested in order to determine what may be a trigger point for prices breaking out of a congested area. Trendlines are often used to help identify the trading ranges and may upon penetration, become an early warning that a breakout may be in process. The longer the period of congestion, the more possibility there is for a build up of orders and thus a larger potential surge in volume on a breakout.

A chart of McDonalds Corp is followed by a graph of the S&P500 Index over the same period to give a sense of application. A break out of a congestion period is an indication that a continuation of the trend might occur in the direction of the breakout. The price of McDonalds during the period shown on the graph was influenced by the European fear of "Mad Cow Disease" and global slowing of economies.

A chart of McDonalds Corp showing a technical study.

A look at the S&P500 Index over the same period

A chart of the S&P500 Index and our trading signals.

The same period of late June through Mid August showed less signs of congestion in the S&P500 Index. Notice that McDonalds broke away from the congestion area, falling further in price through September, leading the eventual move down by the S&P500 Index. Also notice that late August while the S&P500 Index was still climbing, McDonalds Corp began to fall, breaking out of the congested area with about a 2 week lead on the index as a whole. Without company specific news, in an environment of falling profits and slowing economic activity, the fall in McDonalds Corp might be viewed as a signal of changing supply and demand forces in the overall market.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.