Does This Mean The Rally Continues?

Due to my travel schedule, today’s commentary had to be completed before the close of the markets today. As a result, I don’t know how the market will finish the day, but I do know that it’s following a very distinct pattern that could lead to a resumption of the post-election uptrend.

The pattern begins with a multi-day pullback that leads to an Inside Day and then completes when the market resumes its move higher.

The pattern is very useful when you know the key price points that define the market’s resumption of its move higher, and define how well the pattern is “working”.

As you can see in the image of the IWM (Russell 200 ETF) below, A multi-day sell-off and Inside Day existed as of the close on Friday.

The Inside Day isn’t necessarily a reversal pattern. In fact, sometimes it’s a good indication of market ready to continue in its direction from the prior day.

It’s best to view an Inside Day as a day that builds energy for the next move. As a result, its location in the bigger trend and the direction the market trades after the inside day are two very important in factors in trading the Inside Day setup.
In the case of the IWM, the big trend is up, and the multi-day pullback has been an orderly decline to an area we should expect some support.

I’m looking for the Inside day to provide an indication that the pullback is over.

Here are the basic steps of an Inside Day reversal.

1. There isn’t any reversal until the high of the inside day is broken! Therefore, the break of this high is your first indication that the market is moving higher. I also look for an opening range breakout to confirm this move.
2. Once the inside day high is broken by a significant amount the market should not trade back below it. If this happens it is a warning that the Inside day may not be “working”.
3. The next important level to break to further confirm the market is moving higher is the high of the day prior to the Inside day. Once this level is broken the market should move higher, and the inside day high should act as formidable support.

Today the IWM gapped over the inside day high and quickly broke above the high of the prior day as well.

This initial move resulted in a rather larger 1.5% gain in the first 30 minutes of the day, so it’s not surprising that it has not had a convincing move above the 30-minute opening range.

It’s also not surprising that the consolidation since that initial surge has found its support at the price level of the prior day’s high.

A gap over the inside day high can be tricky. In this case, the basic rule that the market should not trade below the Inside Day high provides a level of expected support and risk for a trade.

So long as the market stays over Friday’s high I’ll expect that the next move is now higher.

Now that the market has traded above both the Inside Day and its prior day high, the low of the pullback should be set by the low of the Day prior to the Inside Day.

Over the next few days, if the market pulls back I’ll look for Friday’s high (the Inside Day high) to provide support.

This is just scratching the surface of how to use Inside Days to anticipate market inflection points, but if you start with these 3 simple rules you have a methodical way to see a reversal occurring and measure how well it’s working.

As you can see, it also can give you an opportunity to get into trades if the market pulls back again to test the Inside Day reversal in subsequent days!

Keep your eyes on this one.

Due to my travel schedule, there will not any ETF price level updates today.