How did we know that today was going to be a trending day, and for that matter, an extremely profitable day? We look at three things on the open.
1. Prior day’s close
Looking at the prior day’s close, we established (after Globex overnight trading) that today would be a gap down. Statistics show that approx. 80% of gaps fill, but the larger the gap, the less likely the gap is to fill and the more likely it is to begin a trend day.
2. Market breadth
Once the market opens the first thing we look to is the market breadth, that is, what percentages of stocks are advancing versus declining. We see that today the market opened extremely bearish (only 9% of the stocks we’re bullish).
3. Candle formation at the open
Once we have confirmation of the first two we look to the candle formation to signal our entry. We see that on a 15-min chart the first candle was a large body bearish candle. Looking at a 5-min chart we see that the market attempted to move higher to close the gap, but was immediately rejected initiating the selloff.
After looking at these three aspects, we have a confirmed short entry and, as the day progresses we continue monitoring the breadth and as long as it remains as bearish as our entry we continue to stay short resulting in a very profitable trade.