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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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Trending Market

A trending market refers to the presence of a strong price trend. During a period of time when the market is in a strong trend there are a number of adaptations that technical analysts have to make in order to make allowances for changes in the way indicators and technical tools act. Technical tools like the Stochastic Oscillator which range from over bought to oversold territory will not provide much evidence of a trending market.

The Stochastic Oscillator tracks the momentum of price and when plotted against a stock or index in a strong trending environment is of little use in determining when price may be oversold or overbought. Other methods of analyzing momentum indicators like looking for divergences to give bias for potential reversal signals of price trend may not work as well when a stock or index is in a strong price trend that has been in place for some time. Divergences between technical indicators and price plot have been known to extend over several years at times and so may not be a reliable signal to indicate the timeliness of a price trend reversal.

In a trending environment it is sometimes useful to look at regression studies to help identify potential warning signs that a price trend may soon change or reverse. In the above graph of Cigna Corp you can see that price since 1995 is in a strong and steady up trend. The Raff Regression helps to identify possible area's of support and resistance and helps to identify when departures from the channel may signal potential changes in the price trend in the future. Notice in late 1999 and early 2000 when Cigna's price broke the lower band of the Raff Regression, the MACD produced a divergence in the troughs when compared with price. A divergence is an indication that a reversal of price trend may occur. The price leading down since mid 1999 then reversed and climbed back inside the Raff Regression bands, almost rising to the top band in late 2000. Departure from a channel or regression study on prices can be an indication that the trend in prices is changing. In the instance above, technical studies provided supporting arguments to expect price to climb again after the first quarter of 2000, but the decline that occurred in the first place in late 99 and early 2000 gives a warning signal that valuation perceptions carried a higher sense of risk which may support additional departures from the channel in the future.

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.

Tech Studies

Comparative Relative Strength

Congestion Pattern

Consolidation