I’m writing a book on breakout trading; when I got to writing my rules for breakout trades I wrote “In general, don’t carry breakout trades home overnight. Breakout moves often reverse the move in the following session.” Stock indices had a good breakout sale yesterday (I wrote a blog post about it here); let’s look at their action today.
The daily chart for Dow Jones futures is below.Monday’s breakout selloff was triggered by Friday’s narrow range day and doji bar; I went through the selloff in that post. The breakout sale gave way to a rally today; let’s look at how we would recognize it, where it might start, and potential targets for the rally.
The first reason to be bullish today was the observation that breakout moves often reverse themselves. I’d add that a scan of the talking head blogosphere was full of doom and gloom today-an amusing contrary indicator.
Looking at the chart itself tells the real story, however.Momentum dropped to a buy level. This means we should have been looking for a buying opportunity around the low of yesterday at 7785. Note as well, the Fibonacci retracement support at 7759.This area was tested early, it held, and the market rallied. Profit targets for today’s buy were the first Fibonacci retracement level at 7883 (from Friday’s high to last night’s low). If they get carried away, the 50% retracement level is at 7932.
Refining your ability to anticipate what the market may do can help keep you “in sync” with market swings, and improving your powers of anticipation can increase your trading confidence, making it easier for you to pull the trigger when setups arise.
The breakout reverses itself
.gif "Another Look at Stock Index Futures")
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