Convergence 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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Convergence/Divergence

Normally price and momentum indicators trend in the same direction. When price and momentum indicators do not trend in the same direction it gives perception that the velocity of price has changed and may warn of an impending reversal. The caution is that divergences between indicators and price can keep going over an extended period. The larger the number of divergences and the longer the time span separating them may indicate greater significance for the degree of a reversal of prices.

A chart of Chubb Corp showing a technical study on divergence.

A chart of Cooper Industries Inc and a technical study on divergence.

A divergence between the peaks of price and the peaks of a momentum indicator warns of a potential reversal of the price trend. As you can see divergences need to be confirmed by other indications of price reversal as they can extend over long periods of time. Generally a penetration of a trendline support is useful in this situation. In the chart above you can see the upward sloping blue trendline for Cooper Industries being penetrated right after a divergence that occurred through April and May of 1998. A divergence between troughs of price and the troughs of an indicator is also considered to be a warning sign of possible reversal of the price trend.

A chart of Circuit City Strs Inc showing a technical study on divergence.

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.