The eMini S&Ps have had a breakout setup for the past two days. Tuesday was an inside day and had the narrowest range of the previous four days. Yesterday had a slightly bigger range, but was still directionless, as evidenced by the doji. Yesterday’s action left Tuesday’s breakout setup unfulfilled, so I was still looking for a directional breakout move. (For a complete discussion of breakout setups and trading order my book here.)
The past two days formed a mini channel with boundaries at 1110.75 (yesterday’s high) and 1100.00 (Tuesday’s low). In addition, there was support at 1099 (the mid October high) and 1097.38 (the midpoint of the rally from last Thursday). This gave us reference points for a breakout trade. I added the short trend line from Tuesday’s high to yesterday’s low to give a target for a selloff; that price is 1092.50.
The breakout bars are circled
Below is a 5 minute chart for the December eMini S&P. I don’t generally trade off such short timeframe charts, but I wanted to show today’s structure. I drew the blue dashed line at 8:30 to show the open.
Breakout points are red
The two red lines show the 1100 low from Tuesday and last night’s low at 1097.75. The 1097.75 level was tested three times early this morning before they rallied back up in the pre-market trade. This rally off the low likely drew in buyers who were looking to buy the low of the recent channel.
For us, the two tight range days told us to expect the opposite-that it was likely to be a day when support or resistance wouldn’t hold. The failure to stay in the range would likely change the trading paradigm. These paradigm shifts force traders to adjust to the new paradigm, and give the market the impetus for the breakout mode.
So at the 8:30 open, Spoos were back above 1100; I was watching that level and the overnight low of 1097.50 as points for a breakout sale. 1097.50 was especially important as it indicated the level at which anyone who bought overnight would now be underwater, raising the odds that they would liquidate their long positions, adding to the bearish pressure.
That is in fact what happened-the breach led to a decisive selloff. The first downside target was reached shortly after the open. Traders looking for more downside could target last Thursday’s low of 1082.50. Currently the market is experiencing some “back and fill” action as the early selloff is digested.
While a trader who caught this morning’s selloff could be content with this morning’s windfall selloff, it often pays to watch the rest of the session for additional trading opportunities. There are doubtless longs who have not yet thrown in the towel; an afternoon capitulation could lead to more downside. On the other hand, there are traders who got caught up in this morning’s big selloff; a rally could turn out to be large if shorts got trapped with shorts at the low end of today’s range.
Doing your homework and recognizing the market’s makeup can help you recognize market turning points and give you a plan to trade them.
For more information on trading breakouts in futures, check out my Breakout Futures Trading Method book here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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