My Smash Day Patterns

The siren song of greed is what keeps the public on the losing side of the ledger in this business. That is bad for them but good for us if we can figure out what it is that gets them to bite, what sucks them into wrong decisions. One such "event" is what I have labeled smash day reversals. These are days where the market has a major break, up or down, this violent action pulls the public in to the foray.

There are two types of smash days. The first is pretty obvious. A "smash day buy setup" consists of a day that closes lower than the previous day's low, a "naked close" is what Joe Stowell, who's got a great eye for charts, calls these. Such days may take out the previous 3 to 8 days' lows as well. To the chartist, the public, or professional technical analyst, this looks like a breakout to the downside, thus the extreme selling brings them to the table.

Sometimes they are right, but usually dead wrong if the market immediately reverses itself.

A smash day sell setup is just the opposite (see Figure 7.7). Here what you will be looking for is a day that closes above the prior day's high and most likely "breaks" out to the upside to close above a trading range. This is the twitching worm that causes the public to leap before they look. The illustration shows how this usually looks. What you have here are the buy and sell setups.

Buy here

Sell here

Sell here

Close is below previous day's low

Figure 7.7 A smash day sell setup.

As mentioned, sometimes this is a valid break. However, if the very next day price moves opposite the smash day and trades above the high of a down close smash day you have great buy signal. By the same token, a smash day up, one of those strong closes above the prior day's high, alerts us to sell signal if the very next day price trades to the smash day's low.

The phenomenon is that there is an immediate reversal the very next day, which means the public (sellers on the down close, buyers on the up close) are now in a world of hurt; their envisioned breakout has failed! They swallowed the hook, again, and now price responds with a reversal giving us an excellent entry. That is the pattern and the rationale, the reason it should work. I am a firm believer that when what "should happen in the market doesn't" we have powerful evidence to take a trade in alignment with the new information.

I have selected a few examples of this pattern at work (Figures 7.8 and 7.9). Once we review the other type of smash day reversal, I will explain how I use this pattern.

My second smash day reversal (Figure 7.10) is a bit more difficult to identify but works on the same principle of the market not following through on one day's action and reversing the very next day. The pattern you will be looking for, to establish a buy setup, will be a day that has an up close, not a naked down close. But, and this is the key or secret to the pattern, the day's close will be in the lower 25 percent of the up day's range and will also be closing below the opening of the day in the very best patterns. I call this a "hidden smash day" because of the up close.

Data

Cale Dates

Num. Conv. P. Value Coram Slippage Margin Format Drive:\Path\FileName 149 2 $ 2.500 $ 0 $ 0 $ 3, 000 CT/PC C:\GD\BACK67MS\F5 9.DAT //////////////////////////// ALL TRADES - Test 2 WWWWWWWWWWWWWWW

Total net profit $21,487.50

Gross profit $33,487.50

Total # of trades 25

Number winning trades 19

Largest winning trade $4,850.00

Average winning trade $1,762.50

Ratio avg win/avg loss 0.88

Max consecutive winners 6

Avg # bars in winners 2

Max closed-out drawdown $-4,000.00

Profit factor 2.79

Account size required $7,775.00

Gross loss $-12,000.00

Percent profitable 76%

Number losing trades 6

Largest losing trade $-2,000.00

Average losing trade $-2,000.00

Max consecutive losers 2

Avg # bars in losers 6

Max intra-day drawdown $-4,775.00

Max # of contracts held 1

Return on account 2 76%

Figure 7.8 Smash day pattern at work.

Num. Conv. P. Value Comm Slippage Margin Format Drive:\Path\FileName 144 -3 $ 31.250 $ 55 $ 0 $ 3,000 CSI C:\GD\BACK67\F061.DTA

//////////////////////////// ALL TRADES - Test 4 \\\\\\\\\\\\\\\\\\\\\\\\\\\\\\

Total net profit Gross profit

Total # of trades Number winning trades

Largest winning trade Average winning trade Ratio avg win/avg loss

Max consecutive winners Avg # bars in winners

Max closed-out drawdown Profit factor Account size required

$13,303.75

28 Percent profitable 89%

25 Number losing trades 3

$2,413.75 Largest losing trade $-1,586.25

$720.00 Average losing trade $-1,565.42

9 Max consecutive losers 1

3 Avg # bars in losers 6

$-1,586.25 Max intra-day drawdown $-2,648.75

3.83 Max # of contracts held 1

$5,648.75 Return on account 235%

Figure 7.9 Another smash day pattern example.

What has happened on these days is that price has either opened much higher and then closed up for the day but way off the highs, or opened a little higher, rallied way up and then failed to hold the day's gains. Sure, it closed up a little for the day but way below the high. The buyers got smashed, in either pattern, and chartists will now come in looking for the kill.

Only to be killed themselves-if the next day-price rallies back and takes out this smash day high. Again we see the pattern of a market failure immediately reversed the very next day. This is a most bullish set of

Buy here

Up close but on lower }/a of range

Figure 7.10 A hidden smash day buy.

Figure 7.11 A hidden smash day sell.

events and calls for going long-if the stage has been set for a rally by our background tools such as

TDW TDM

Market relationships, overbought/oversold, and trend.

A hidden smash day sell is just the opposite. Look for a down close that is in the upper 25 percent of the day's range and above the open of the day. Our entry comes when price falls below the hidden smash day's low the very next day indicating the rally has failed. A quick look at Figure 7.11 should establish what this pattern looks like.

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