In last night’s Swing Trader’s Insight I labeled the eMini NASDAQ futures as having a breakout setup for today. This was logical, given that Apple’s earnings report was due after the close yesterday, and many traders would be cautious ahead of the release. The breakout setup gave us a trade opportunity this morning, and the overnight action gave us a great early entry.
Breakout setups are one of my favorite patterns to trade, and today’s NASDAQ trade shows why. The range contraction, inside day and doji bar told us to anticipate a potential large directional move today, and the resulting move was what we expect from a good breakout trade.
It was logical that traders wouldn’t want to commit to a position ahead of Apple’s earnings as it had the potential to cause a large move in the NASDAQ after earnings were released. Having a position on before the earnings report would be a gamble that not only would you know how earnings would come out, it would also be a call on how earnings were compared to whether the market had already discounted the actual release.
One of the major benefits of breakout trades is that you don’t have to try to figure things like this out. Rather, we let the market get started in the direction it wants to go, and we get on for the move, when things go right. The composite market opinion is reflected in its price and price movements, so we can focus on that for our trading.
Apple’s earnings report was a classic example of why short term traders should focus on price rather than fundamentals. By all accounts, Apple had a great quarter, and its stock, along with the NASDAQ, were sharply higher last night as a result. At first glance, going long might appear tempting today, even after the big rally.
However, going back to what I said earlier, it’s usually best to keep an open mind as to the direction for a breakout move, as it can be difficult to determine where a market will go after an event like this. By the time we got to today’s trading session, were Apple’s earnings priced in or not? Here was an opportunity to let the market decide where it wanted to go.
For a breakout trade, we “go along for the ride” by going long IF the market moves above close in resistance OR go short IF the market moves below close in support. We look to enter in this manner because we anticipate the initial move will be a springboard to a larger move in the initial direction.
Today also was an example both of why I trade stock index futures during the day (stock market hours) session and how we can use overnight highs and lows as additional breakout reference prices. For breakout trades, we normally start with the previous session high and low as our reference prices. However, in today’s trade, the overnight rally in the NQ meant the market was both well above the previous day high and far above the previous session low, making them less than ideal reference prices.
That’s why I suggested we use the overnight high (5947.50) and low (5925.25) as reference prices when I wrote this morning’s update for Swing Trader’s Insight. The premise was that if the market moved above the overnight high, we would anticipate more rally to go. If it dropped below the overnight low, we would have a “buy the rumor, sell the fact” type trade.
The 8:30 AM open was 5932.25, roughly in the middle of the overnight range. The bears quickly asserted themselves, pushing the market below the overnight low about 10 minutes into the session and triggering our short sale. (I like to use resting stop orders to enter breakout trades; it keeps me from having to think too much about entering a trade in a fast moving market.) The initial stop loss could go above the opening high of 5935.50 or the overnight high.
The “buy the rumor, sell the fact” character of the open carried through this morning. The Tuesday low was reached about an hour into the session (our early entry gave us a lot of early profit on this trade.) By around 10 AM it dropped to a session low of 5856.25, and then staged a minor recovery.
Essential Guide for Futures Swing Trading
In this guide, experienced trader and broker Scott Hoffman explains the trading methods he uses to analyze and trade the futures markets and to publish his trade advisory, Swing Trader’s Insight.
Risk Disclosure
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