Breakout/Fakeout
This morning was an excellent example of why even day traders need to do some planning before the market opens. And how a little math will improve your bottom line.
The market opened almost unchanged, and then had a small surge to the upside. Considering the small ranges of the past two days (an inside day following an inside day) a breakout was not unexpected. But would it carry through?
The reversal occurred at a 127% retracement of yesterday’s range. [5-minute chart to show two days.] Most who use Fibonacci retracements seem to think they stop at 100%, but after the market completely reverses a move it sometimes goes just far enough to convince traders we are exiting a range. And as everyone jumps on board (look at volume), the market turns around. 127% is a typical reversal point.
Does that mean you should sell at that level? Of course not. Sometimes it goes to 162%. Sometimes it actually continues. But the break back through yesterday’s high (green line) or through yesterday’s close (blue line) said get out of long positions and consider going short to get into the best move of the day.
