Thursday, September 02, 2010

Consolidation day Strategies

It's very rare to get two trend days in a row in the market.  Often what happens after big market moves is that the next day is one of consolidation.   We wanted to go over a day-trading strategy that works very well in this type of benign environment.  Why do we say "benign"?    Very simple: we broke the mini range of SPY 104.3-107 and are holding above that while TLT is red.    As long as treasuries stay muted and we hold 107 we should be in an easier more forgiving tape.

Let's look at two triggers we had on our lists today, CTRP 42 and DNDN 40. 

Here are the daily charts:

CTRP we liked for a breakout of 42 over trend-line. 

DNDN 40 has been on our list for weeks. 

CTRP went through 42 near the open and quickly reversed.   Stock slowly faded down until it hit the 20EMA/P and bounced to make new highs.  A very common move in a consolidatory yet friendly tape. 

The second one is one of DNDN 40.  We had a very good idea that it would fail on the first attempt through 40 as the stock was already above its ATR and extended away from EMA.  We posted that we didn't want it to break 40 but would try it anyway if it based and let the EMA catch up.  It didn't wait, broke 40 and reversed instantly.  However, the same thing happened on DNDN in which it reversed back to the EMA, this time EMA/R1 combo, and then made new highs.     

The break-out fail/but buy dip on the EMA/R1 or EMA/P strategy can be very useful in consolidatory/tired yet friendly and forgiving markets.  Stops on these type of trades are very tight (a reversal back through the EMA) so it's easy to get off good risk-reward trades.   This type of strategy, however, would not have worked well in the 104.3-107 SPY range in which market was more hostile/scared.