Trading What I See

Trendlines provide support and resistance when approached from either side. Like horizontal S/R levels, when a trendline is broken, a pullback is often a trading opportunity.

Unless you caught the early action today, there weren’t many good entry points for this morning’s drop, which is why I am showing a five minute chart. Yesterday provided the setup.

Just before yesterday’s close, price spiked to a high for the day and reversed through a rising trendline. I’ve marked in yellow a Wyckoff Spring and divergence for a short sale setup, but it was far too late in the day to take any action. The trendline break occurred during the 15 minutes that futures trade after the regular market closes.

That means that this morning there were three possible moves the market could have made, and I only consider one of them tradable. The market could have changed its mind and gone up. That would have required waiting for a pullback. The market could have continued straight down. A pullback would also be required.

But in this case the market was kind and made a small move to the upside, a pullback to the broken trendline, and then reversed. That pullback to the trendline can usually be taken as a trade (in this case a short sale) provided you can find an entry that allows a close stop. In this situation my entry would be at the cross down through the moving average (either of them.) My trailing stop would then be just above the same moving average for a low-risk trade.

Remember, I don’t take trades because moving averages are broken. The trade was valid because the trendline was broken, followed by a pullback. No pullback — no trade. But once the pullback occurred, the moving average can be used as a trigger.

The rest of this post looks better on my 3-minute trading chart (not shown) but I’ll explain it here. Point “B” was a nice pullback to the shorter moving average. This could be an entry if the first one was missed, since the short-term trend at this point is definitely down. The pause at “B” can also be used as a measuring point, and the market made its first bounce at the 100% Measured Move at “C.”

After that, on the 3-minute chart the moving averages went flat much earlier than is evident here (at the yellow arrow,) but that still left several false entries that would have lead to small losses. Fortunately, the fast move down this morning more than made up for them.