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Plethora of "inside days"

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My trade station was blinking quite a bit this morning at various alerts I had set on my q-charts trade station. Early on, the alerts were coming from "inside day" breaks ABOVE yesterday's "inside day" and I also received some DOWNSIDE alerts from "inside days" where stocks were breaking below yesterday's low.

It's not often that we see the major market averages all show "inside days" in their charts and yesterday's action, while rather uneventful, set up a plethora of "inside days" which hinted that the MARKETS and perhaps many stocks were at some type of near-term pivot point.

Current action has many of the upside alert "inside days" in stocks like IBM, MSFT, AMD and GE all giving back their early session highs. And with it, we witnessed some buying in Treasuries as YIELDS moved lower from their best levels on the session. So far, the "best" inside day results have come from stocks like IP, AU and GS, which gave us "inside day" downside alerts.

While "inside days" depict a very short-term type of pivot point where market participants appear to be in agreement on a stock's current price (the inside day has a stocks daily trading range INSIDE of the previous days range and hints at price equilibrium) short-term traders know this "pattern" as a more neutral type pattern and when the prior day's "inside day" is broken to the upside or downside, the trader takes action at the break, with stop just above the previous day's inside day.

IBM Chart - Daily Interval

A trader may have had IBM on his/her "inside day" trading list for today. This morning's higher YIELDS in the bond markets bode well for looking bullish some strong stocks and IBM has traded well from prior "inside days" on both the upside and downside. This morning's break above yesterday's high of $82.00 would have a bull trading the pattern going long at $82.01 with a tight stop just below yesterday's low of $80.18. Then each day, the bullish trader would simply follow the stock higher with a trailing stop under the prior days low. Note that IBM gave an "inside day" on 08/12/02. A trader trading the "inside day" pattern may have gone long IBM on 08/13/02 on the break higher at $72.65. If so, that trader would still be holding IBM long, with a stop under yesterday's low. That's right! IBM hasn't broken below a prior day's low for some time. August 5th to be exact.

While trader will use the "inside day" for bullish and bearish action point to initiate a trade, traders that currently hold positions that are deemed shorter-term for the account will also use the "inside day" to help determine exit points. For example, a trader that may have played IBM bullish from $75 that is holding a decent gain, may be wondering how much further short- term upside the stock has. Since IBM has broken below a previous day's low for some time, the "imagining" of having traded an "inside day" trade from earlier might have a trader holding IBM long, simply following the stock with a trailing stop just under yesterday's low.

You never really know what to expect from an "inside day" type of pattern. It can really pay off big, sometimes small, but the stop for bullish and bearish traders is simple and disciplined. The stop is below the previous day's low for BULLISH traders, and above the previous day's high for BEARISH traders. All the trader does is look for the break.

It is ALWAYS advised that the trader back test the "inside day" trading technique with the stock they look to trade. It's very simple. Pull up a bar chart, and look for past inside days. AVOID those stocks that lack consistency or have only provided very small moves where the trade just doesn't make sense for what you're looking for. FOCUS on those stocks that have a good history from such trade setups.

Have a target in mind for your trade. In the above example, I'd think a short-term bullish target for a trade initiated today in IBM would be retracement at $85.64. Similar perhaps to a bull's target of $78.18 from 08/13/02 entry.

Jeff Bailey
Senior Market Technician
Option Investor

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