Breakout setups are one of my favorite patterns to trade in the futures markets. That being said, sometimes a breakout pattern is signaled but the market still goes nowhere. Knowing when not to trade is often as important as knowing when to trade; let’s look at today’s trade to see what there is to learn from today.
The daily chart for the September S&P and today’s Trade or Fade report for the September eMini S&P futures is below. Today had a breakout setup as Friday had the narrowest trading range of the previous seven sessions. It also was a doji bar, as the open and the close were approximately the same. Combined, these show that neither the bulls nor the bears were willing to commit to move the market.
When breakout setups don't break out
Couldn't take out Trade or Fade resistance
When a market has a breakout setup, Trade or Fade tells us to look for the market to make a directional move as it moves away from a short term equilibrium point. The key is to find a price level that will serve as a springboard to the directional move we seek to enter.
For today’s session there were two prices to watch on the upside. The first was the old standby at Friday’s high of 1076.00. Before I developed Trade or Fade I would use the previous session high and low as breakout points.
The Taylor Trading Technique places emphasis on the previous day highs and lows as “reference prices” to interpret market action. On a “normal” TTT day we watch for a price reversal at the previous day’s high or low; on a breakout day we tend to look at the previous high and low as breakout prices. I drew the blue dotted lines at Friday’s high and low to illustrate them.
The move above Friday’s high saw minor follow through this morning, rallying to the session high at 1080.25. Had you bought that breakout, you should have exited at a breakeven or with a small loss-breakout trades should move promptly in your favor, or they’re likely not going to work. I also had resistance at 1080.13; that was the 50 percent retracement of the selloff from the 1098.50 high on Tuesday/Wednesday of last week. The inability to clear this level was another indication that the breakout rally wasn’t going to follow through.
Trade or Fade subscribers also knew that there li8kely hadn’t been enough of a rally for an upside breakout. Today’s first Trade or Fade resistance was 1079.94. I view the Trade or Fade levels as support and resistance, so I like to see the market exceed a ToF level before entering a breakout trade. In the eMini S&P futures, I wait for the market to exceed a ToF level by a point before I enter; this would mean a ToF long entry at 1081.00 today. The eMinis stopped just under there, so there was no entry today.
I’ve had a few questions about what to do with stocks indices this afternoon. I’d still be watching the 1081.00 level that Trade or Fade had at the beginning of the session; a rally through it (provided it occurs before about 2:30 Chicago time) would warrant a long entry. If we don’t get that, we’ll look for something else tomorrow.
For more information on trading breakouts in futures, you can get more information on my Trade or Fade advisory here. For an in depth discussion of breakout trading, get a copy of 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.
