Trading What I See

When we tried to break out this morning, there was no volume behind the move on the 3 minute chart. It looks OK on this 15 minute (shown), but in real time there was only a slight increase over late yesterday afternoon. The breakout lasted less than five minutes, and we were on the way back down. Repeat after me — upside breakouts require volume increases if you want consistent results.

At 7:30 (Pacific) we made a double bottom against a low formed yesterday. When we moved back up, that completed the fourth point of a rectangle pattern. It’s easy to overlook on a shorter timeframe. That’s why I always keep a 15 minute chart visible, although I seldom use it to take trades.

Even before the rectangle pattern formed we had tradable information. Point #2, just after the open, was a Test of Top. The first test of a previous high will often fail. Alan Farley, in his book The Master Swing Trader (highly recommended) talks about this situation when writing of his 3rd Watch pattern.

Use 3rd watch strategy to trade triple-top breakouts. …. Both ascending triangles and rectangle formations rely on the same price mechanics. Channel resistance often breaks on the third high as momentum triggers bar expansion.

On any timeframe when you have Tests of Top, consider having a reversal bias on the first test (#2), and a breakout bias on the second (#3.) You’ll find you are often leaning in the right direction.

We’ve already exceeded the minimum target for a rectangle with only a slight pause before moving on. Tomorrow we’ll see what happens when (make that if) we reach the top of a parallel channel.