Breakouts 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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Breakout

A breakout is the point at which the market price breaks away or moves out of a trading range or pattern. A breakout is simply a resolution in terms of price. The trend usually continues in the direction of the breakout but to avoid a whipsaw, traders often call for a 3 to 5% move outside of the previous trading range or pattern before they consider the breakout to be a valid indication of a continuation of the trend for future prices in the direction of the breakout.

A breakout often signals a resolution to indecision and can lead to significant changes in the perception of value. A display of a 20 period/2 standard deviation Bollinger bands with trendline penetration can give traders an earlier sense that a breakout of a trading range is in process.

Another look at a Breakout example

A breakout of a trading range can be the identification of a change in the balance of supply and demand. It may point to resolution or maturing of events or perception. It often points to a continuation of the trend in the direction of the breakout but does carry the risk of whipsaw when the breakout is small or lacks continued momentum.

Our critical day research can have use in helping to identify when a breakout from a trading range is of greater importance. A continuation of the trend in the direction of the breakout carries more confidence when the movement coincides with a critical day.

A study of technical analysis can strengthen a perception of changes in supply and demand and allow for stronger trading opportunities. Critical day analysis has significant value when combined with trade strategies. Knowing when the market may change direction with such a high degree of success is a valuable edge for investors. If the market reacts to technically identified levels, it provides as much information about supply and demand as when they do not react.

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.