DJX (Mini Dow)

This trade is an example of one not to take! The setup was ahead of the Fed announcement, and this is a terrible time to initiate any new trades. It is best to wait for the market reaction before entering a trade ahead of the FOMC.

Internals were deceiving because the Advance/Decline Lines were very bullish, and the volume ratio was very bullish as well. However, MACD was curling over on the advancers, even though they were +2400. Never let the numbers fool you when that MACD begins to look like it could curl over. Even if the advancers decrease to 2200 or even 2000, that is enough for a significant pullback.

The ticks began to look less bullish, as though they had a slight trend down from the open:



Volume tricked me, since the ratio was very bullish, but the MACD was growing on the down volume nonetheless. With its moving average well above it, the down volume had much room to move up and make a big difference in price, which is what it did!




Volume was trending up slightly, but still more sideways than it tends to be on a trending day up. I also noticed that the detrended price oscillator was beginning to trend ever so slightly down....



The DJX chart showed weakness as well. The 5 crossed ever so slightly below the 30 on the 30-minute chart, and the stochastics gave a sell signal, NOT a good sign from a 30-minute chart!


Price also had slipped below the 30 of the 10-minute chart, and stochastics and CCI were giving sell signals. These sell signals sometimes show up on a 10-minute chart, but the 30-minute or hourly charts are still so bullish that it can be taken as a buyable pullback. However, the 30-minute chart was developing slightly bearish moving averages, and price was trading in all intraday time frames below the 200 ema/sma (simple moving average). This is another sign of potential weakness:


The two-hour chart did not have a confirmed buy signal:



And the hourly moving averages were still bearish:


So to summarize, this was not a high probability trade because even though the MACD seemed strong in the 30-minute time frame, it was not backed up by the 200 moving averages or the hourly/2-hour moving averages. These potential areas of weakness made the 10-minute pullback a low-probability 'bounce trade.'

The slight downtrend in the ticks, and the detrended price oscillator on the volume, and the weakening MACD on the AD Lines all were warning signs that pointed to a low probability trade to the upside. Before every trade, we must ask ourselves, "Is this a high probability trade?"