The eMini S&P futures had a breakout setup today. Yesterday was an inside day and the narrowest trading range of the previous seven days, a combination that I consider to be good “heads up” to look for a directional, breakout move (for the Trade or Fade method of breakout trading go here). In the session following the breakout setup, I look for near in support and resistance points, anticipating that a move beyond one of those points will be the springboard to a bigger rally or selloff.
The daily chart for the eMini S&P futures is below. Normally I use the previous session high and low for breakout points, as they were the levels that the bulls and the bears stopped in the previous session. In this case, there were two breakout points to consider-yesterday’s high at 1122.75 and Monday’s high at 1124.25. Monday’s high was the high of the recent rally, so it will also be resistance.
Will it break out today?
If you had tried a breakout buy this morning you would likely be either stopped out for a loss or holding on to a losing trade. The reason I wanted to go through this is to discuss my philosophy on support and resistance, to help give you a better understanding of how to view and trade support and resistance for your futures trading.
I don’t view support and resistance as concrete, “brick wall” type things. They are decision points-a place for acceptance or rejection of higher prices (for resistance) or lower prices (for support). Often a market will push over support or resistance, not get follow through, then reverse field when the impulse move fails.
This makes support and resistance a more fluid thing. In this case, we look at either yesterday or Monday’s high as a reference price. We want to know whether traders will be accepting about buying at higher prices-either covering (losing) shorts or establishing new long positions. If traders are accepting of higher prices, the rally will continue. That’s what we hope for when buying breakouts.
If the rally fails, it means that the bulls are unwilling to continue buying at higher prices. As buying interest wanes, price move lower. This is what we had this morning. After the ISM services number, S&Ps were able trade over yesterday and Monday’s high. On balance, traders were unwilling to buy at higher prices, so as the buying dried up the market sold off.
Looking to the rest of the day, I would still be interested in buying if S&Ps rallied into new highs. There will likely be traders who shorted into this morning’s rally; a second rally into the highs will pressure them into covering shorts, adding to the upside momentum. The “trapped trader” scenario is often a good framework for thinking about market psychology. Looking a bit longer term, with European economic numbers and an ECB meeting tomorrow, then the July U.S. payroll reports on Friday, traders may be cautious about extending any breakout moves ahead of the data.
Support and resistance should be the cornerstone of a trader’s market analysis. Thinking of them in terms of acceptance or rejection can enhance your understanding of them and help give you a deeper understanding of markets and market psychology.
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit 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.
