Friday, January 14, 2011

Signs of trend strength

Today's first bar was unlikely to be a first reversal, since it was between yesterday's recent swing high and low. However, folks waiting for the first reversal should heed to very strong and obvious signals the market gave regarding trend strength.

First, the entry bar above b1 was a shaved bar. This shows urgency on the side of longs. Second, the first reversal bar b3 did not trigger. When a reversal bar does not trigger, its a sign that there is certainly more up. Instead, the price broke above it, another bullish sign. The news reaction did a breakout test of the open at b6 low. What this means is folks who bought the open had more buy orders waiting at the same price. This usually means a strong bull day. b4 and b6 did not qualify to be first pullbacks since they would trigger a buy above the HOD. b8 was a doji after a weak close, and not really a buy setup. b13 was therefore the first pullback and could be held till the end of the day.

The red diamonds indicate poor reversal signals which in turn indicate trend strength. b7, b21 and b71 were poor looking reversal bars (they were bull bars or had large entry side tail). b34 and b38 were one tick inside bars. b57 did not trigger on the next bar. All these signs show bull strength and half-hearted shorting, which meant only long positions should be taken all day. This is because most good traders will not be selling those bars but in fact, will use them as points to add to their positions.

True there were overshoots at b7 and b21 but overshoots only imply a pullback is due. An obnoxious overshoot is needed for a real reversal. This is also why W1P is a much better trade than W.

The other strong trend signs today were the 20+bars above ema and medium sized bars. The fact that every single swing low was above the previous swing low is also the sign of a healthy trend. As long as many or all these signs are present, dont even think of counter trend trades.

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