Trendlines 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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Trend Lines

"The Trend is Your Friend". This old saying is a very worthwhile piece of advice for any trader. Determining what the trend is and when it has changed is a basic building block for successful trading. A trend line helps identify the trend as well as potential areas of support and resistance. A trendline is a straight line that connects two prominent peaks or troughs in the price action of an underlying tradable. No other price action must penetrate the trendline between the two start points. In this way a trendline marks a support or resistance area where price has turned (peaks and valleys) and has not been violated. The longer a trend line is the more valid the line is, especially if price has touched the line several times without penetration. When a longer term trendline is penetrated it gives indication that a reversal of the trend has a higher probability of occurring with future price action. This is not to say that penetration of a trendline is proof of the future path of prices. As with all indications of a reversal of price trend, there is no foolproof method of predetermining what future prices will be for any tradable.

On the graph above the number 1 is a trendline drawn on the Relative Strength Index (RSI) which is an indicator that tracks momentum changes. Trendline penetration has an importance on this indicator in that it is a warning that a possible reversal of price trend and momentum may occur. The number 2 is a second trendline and penetration of that trendline on the Relative Strength Index. As you can see, both penetrations are followed by price declines. The number 3 on the graph shows a divergence of both the peaks and the troughs against the Relative Strength Index. The RSI has a series of rising peaks and rising troughs through March 2001 while price is showing a series of falling peaks and falling troughs. This divergence is an indication of future volatility but without a clear sense of future direction. Looking at the On Balance Volume at the top of the graph, the indication is that more volume is occurring on down days than up days and so leads to the conclusion that until OBV penetrates the upper resistance line at number 4, there is a low probability of being able to feel confidence that the downward trend in prices for Nortel will reverse.

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