False Breakout
Yesterday we ended the session trying unsuccessfully to get through the 799 level, and I mentioned that the pattern looked like an upside triangle but with the wrong volume. Unless a triangle’s volume consistently decreases, they will often fail. Add a few more factors, and today’s false breakout was tradable as a short sale.
In white I’ve marked off the last pullback and its retracement. As usual, if a reversal is going to occur, it will often happen at a 127% or 162% external retracement. I consider this zone a danger area, and try not to initiate trades there.
Not only did we reverse at 162%, it was also at what some traders call a “Round Number.” In this case the number was 800. These numbers often become important support or resistance levels since many traders will exit as we approach them.
Finally, there was a Wyckoff Spring pattern — a break to a new price high or low with an immediate reversal. If a breakout can’t hold or continue, we’re likely to have a tradable move in the opposite direction. I particularly like this trade when it is accompanied by a divergence as marked in the Stochastic. This is one of the few times I will enter on the break of flat moving averages.
The move down to “A” gave a nice Stochastic divergence signal for a profit-taking exit. Unfortunately, as I’ve explained over the last few days, unless there are other reasons for a trade, I want the first pullback to be at least 50%. The 38% retracement left me watching the continuation down.
But as I’ve also pointed out, if the first pullback is only 38%, the second is likely to be the same. Point “D” also came right back to the declining moving averages. I would have preferred more separation between the two MAs, but a stop above “D” was never challanged
The bottom didn’t meet any good Fib measurements, but there was a nice divergence for an exit. And catching two out of the three moves by following the rules isn’t bad.
