Whipsaw 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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Whipsaws

A whipsaw occurs when the market does the opposite of what is expected. An investor who makes a trading decision based on an expectation of the path of future prices, only to have the opposite occur is said to have been "whipsawed".

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.

The MACD indicator (solid red line) is the difference between two moving averages and is plotted with a trigger line which is another moving average displayed as a dotted line on the graph above. When MACD falls below the trigger line, a sell signal is given and when the MACD rises above the trigger line a buy signal is given. One weakness with this indicator is that during periods of many short term price reversals, the MACD can crossover its trigger line many times, giving inappropriate buy and sell signals. Here's a close up view of Alza Corporation to more clearly illustrate the concept of whipsaw.

Sometimes methods of filtering out whipsaw signals is to generate the indicator on a moving average of prices rather than on the closing prices. In this way, a smoothing of the closing prices has already taken place before the indicator is applied to the data. Generally, using a 2 or 3 day moving average on the closing prices and then generating the indicator using that data can help eliminate some of the whipsaws that are bound to occur.

There is always a tradeoff between timeliness of the signal and filtering to reduce whipsaws that will become part of the individuals decision making process in deciding whether to filter price data and in what way.

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