The EMini S&P had an NR7 day (narrowest trading range of the previous seven sessions) on Tuesday. This pattern told us to anticipate a breakout move today, which gave us a good trade opportunity this morning.
Stocks rallied on Monday, pushing the S&P up to the 2100 level. The 2100 level has been resistance this month, and Tuesday saw a selloff as the market corrected against that level. Tuesday’s small range indicated a large directional move was likely today- either a rally back up above the resistance at 2100 or a continuation of Tuesday’s selloff.
Our trade opportunity lay in letting the market decide which way it wanted to go; we would look to get on this move relatively early and then ride it as it extended in that direction. We determine which way the breakout will go by looking for the market to move above nearby resistance (often the high of the previous session) or move below previous support (often the previous session low).
If we used the previous session high and low as our initial breakout reference prices, the EMini S&P futures initially broke Tuesday’s low last night, making an overnight low of 2084.00. It rebounded a bit however it was still solidly negative (and below Tuesday’s low) at the 8:30 AM stock market open.
The fact that it was below Tuesday’s low told us we could continue to look for short sale opportunities. On breakout setup days I prefer to look to enter trades on impulse moves- a move in the session’s predominant trend, rather than retracements.
I have previously commented that I like to user overnight highs and lows for reference prices either for breakout trades or Taylor Trading Technique setups. In this case we could use the overnight low of 2084.00, taking a short entry if and when the market broke below that level.
The intraday chart above shows how the morning played out. The overnight low was taken out shortly after the 8:30 open, pulling us into a short sale. It fell over the course of the morning, making a session low of 2066.75 around 10:45 AM. I often look to close breakout sales by midday and either stop trading for the day or occasionally I look for a second trade opportunity. Today I wanted to get flat ahead of the release of the FOMC meeting minutes so I could look for a potential trade opportunity after the release.
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