False Breakout
Yesterday I mentioned the possibility of a breakout today, and it looked like it was happening — for a few minutes. We started with an almost five point gap on fairly good volume. Price opened above the highs of the last two days on the Russell, which has actually been the weakest of the indexes I follow. Three minutes later we were on our way down. Predictable? Not by me. But the move gave two different short sale setups within a few minutes of the open.
The first setup is most easily seen on a longer term chart. While many watch an hourly chart, I don’t really like them. If you are trading stocks, there are 6 1/2 hours to the trading day. Index futures have 6 3/4 hours. In either case the last hour of the day is shorter than the rest. Am I being picky? Probably. For that general time frame I use a 45 minute chart for futures, and there are exactly nine of them in a trading day. (I used to use 65 minute charts for stocks. With computers, you can make the rules.)
The setup is from Victor Sperandeo. If you haven’t read Trader Vic — Methods of a Wall Street Master, you’ve missed a great trading book. The pattern is called the 2B SETUP. I won’t go into much detail, but the essence is that a trendline break followed by a new high and a failure is almost a definition of a trend reversal. It’s easiest explained with a picture, so here it is. This pattern alone is worth much more than the price of the book.
The second setup, occurring at exactly the same time, comes from Larry Williams. He calls it the Oops! pattern. It requires a gap above the previous day’s high that can’t hold. In other words, it fails soon after the gap is made. And all the traders that took the breakout say “Oops!” He trades it as a one-day trade, holding until the next day’s open. We won’t find out until Monday if his trade works. I take my profits a lot earlier.
The Oops! pattern doesn’t really require a chart to understand, but you’ll still want to look at this one. Once you had convinced yourself that the true direction was down there were multiple patterns, Fibonacci measurements, and pullbacks for trade entry and exit. Too much to explain in one post, but this is what the Trading What I See Blog is all about.
Resources: Trader Vic–Methods of a Wall Street Master
Long-Term Secrets to Short-Term Trading
[…] Because on the 15-minute chart, that break above and then below yesterday’s high produced a Trader Vic 2B SETUP (see example.) The 2B occurs at trend reversals — in this case from up to down. My good setup is now in the wrong direction, and as you can see, taking it would have been a mistake. Instead I started looking for an opportunity to join the new downtrend and found two before lunch. […]
[…] We gapped below yesterday’s low (barely) and soon reversed back above it. Yes, that’s the Larry Williams Oops! pattern once again, and today it worked out nicely. The first pause was at what I have labeled Support. Remember that if you are below a support/resistance level it is considered resistance. If you are above it, we call it support. See it act as resistance at 6:45, and become support 45 minutes later? […]
[…] Even more interesting is that this sequence has created a Trader Vic 2B setup. These occur when price breaks a well-established trendline and then makes a strong pullback to a slightly higher high that fails. “C” is 1.2 points above “B.” […]
[…] Since I won’t be commenting for several days, I’m including a Daily chart that shows some potential problems. You’ve just seen an example of the power of a 2B reversal. If you need a refresher, check this earlier post, or buy Trader Vic’s book from the link at the end of this post. […]