The S&P 500 futures are having a strong rally today.Yesterday’s pattern gave a breakout setup for today’s trade.This meant I was looking for a breakout, directional move today.Recognizing this setup meant you could have been a buyer of S&Ps this morning to take advantage of this move.
Below is a daily chart of September S&P futures. I circled yesterday’s bar; it had the narrowest trading range of the previous four sessions, and was also a doji (the open and close were approximately the same.
The range contraction and doji bar were signs of indecision among traders yesterday.After Monday’s big selloff, the market consolidated yesterday as bears were unwilling to continue to sell at lower prices, and bulls were hesitant to buy after the big selloff.
Indecision is not a constant state in markets, and market equilibriums tend to be unstable.In this case, bulls recognized that they were able to buy at much cheaper prices than a few days ago. On the other side, bears (especially new shorts) were concerned as to whether the selloff would extend, or whether they had sold “in the hole” as selling dried up.
As today’s trade got going, the market started finding strength.As it did so, the bulls gained more confidence, and were willing to buy at higher prices. The bears, who found their losses on short positions increasing, bought back their shorts, adding to the buying pressure. As this goes on, it fed on itself, and the rally gained momentum.
So for breakout trades, once we recognize markets with breakout potential, the job is to find breakout points, that is, price levels which, if exceeded, are likely to result in a sustained move. The first point to consider are the previous day’s high and low. As these were prices where the market stopped the day before, exceeding them the following day would be significant.Other points to consider could be swing highs and lows, moving averages, or Fibonacci retracement levels. (I developed my other advisory, Trade or Fade, specifically to find potential breakout price levels).
For the S&Ps today, this meant the first breakout point was at yesterday’s high of 894.50. There were tow highs intraday highs at 896.75 and 900.00. As the market backed off after these highs were made, you could have gone long when they went through either of these resistance points a second time. (The Trade or Fade entry point was 899.09)
Once long, you would place stop losses. These could have been below yesterday’s close, the high, or below either of the two intraday highs.
Profit targets could be the Fibonacci retracement levels at 903.63 and 908.20. The down trendline off the recent highs is also a target; it is at 909.68. For the balance of the session today, we have the FOMC meeting announcement at 1:15, so caution might be in order.
Good breakotu rally
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