Anatomy of downside moves.

I thought it would be worth looking at the Dax 5 min chart on Friday and the SPI 5 min chart today.

Both had downside moves with the structure showing similarities which could be exploited when timing trades.

Trading inside bars that fail can help in capturing these momentum moves.

The move down in both cases was steep with little or no retracement until a large volume bar printed in both cases.

I call these exhaustion bars with a wide range and large volume signaling forced selling in the market.

These bars signal a potential short term momentum slowdown as buyers and sellers move to a more equal balance.

In many cases after a bounce, price retests these lows giving a gauge of directional strength.

In each of these examples price moved to new lows showing that buyers have only slowed downside momentum.

The new lows are showing less volume than the exhaustion bars but more than the retracement bars.

As the day progresses selling dissipates and we see higher lows form, setting up potential for buyers to take control.

Points to take away from these trend days.

Failed inside bars can be efficient momentum entries.

Look for exhaustion bars to halt the momentum.

Expect a retracement in the short term reaction.

Watch for a retest of the exhaustion lows.

Gauge how strong sellers are by the strength of the retest. (new lows show strength in sellers, higher lows show buyers getting the ascendancy)

Look for reversal bars which coincide with higher lows to time reversal trades.

SPI 5min exhaustion.jpg (125.59 kb)                            

Dax 5min exhaustion.jpg (117.93 kb)