Trading a Post-Trend Day (by Biffermas)

Monday's trend day sparked some intelligent comments regarding what comes next, with many traders correctly calling the sluggish consolidation doji that formed on Tuesday.  Momentum traders seem to despise the slow action that typically occurs after a strong move, but there are some high-probability opportunities that arise in the aftermath.  The so called, "Post Trend Day" is one of my favorite environments to flip equities.  

This setup starts with a trend day, which can usually be identified on a daily chart as a day that opens at one extreme and closes on the other, with a wider than normal range.  I like a roughly 2% rise.  Monday was a textbook example.

My method is pretty simple, and I’d enjoy hearing how other traders arrange their approach.  I trade the big broad boring etfs: DIA and SPY.  I avoid anything more speculative since they don’t always follow the diversified markets.  I simply place a horizontal line through the center of the opening 15-minute bar of the post-trend day and swing trade around it.  If the market rises and the NYSE intraday tick goes above 1000, I’ll short the market with a target 0.25% below the horizontal line.  I close the position if the tick rises above 1000 soon after on a separate 5-minute bar, since this can indicate something stronger than I want.  I’ll go equally long if the reverse setup occurs.  Many people like to trade the VWAP rather than a static horizontal bar, which also works well.