The eMini S&P futures had a breakout setup for today. Yesterday’s missile launch by North Korea gave an opportunity for a downside breakout trade last night. Lack of downside follow through and subsequent upside reversal rally this morning gave an upside breakout move.
Monday was a breakout setup for the eMini S&P futures, as Monday was an NR7 day and a doji bar. That meant we would be looking for a strong directional move if it broke below the Monday low of 2436.25 or above the Monday high of 2449.25.
Yesterday’s news of the North Korean ballistic missile launch came out in the 4 PM CT – 5 PM break between trading sessions. This led to a lower open of 2434.00 and a drop to an early session low of 2423.00 in the first 15 minutes of trading. It was unable to regain the 2434 open / high last night, and it eventually made a session low at 2421.00 around 4 AM.
I was looking for a game plan for the day session when I was writing this morning’s watch list for Swing Traders Insight (STI). The market was trading in the upper 2420s as I was writing, and given the gap lower open I suspected we could see a rally if it rallied to fill in the gap – at that point, anyone who sold last night would have a now losing trade.
In the STI Morning Watch List, my comment for the ES was: “Breakout setup (NR7, doji). It gapped lower overnight; watch 2434.50 as a pivot point this morning. It staged a big recovery this morning; was that it for the short side?” I wanted to watch 2434.50 on the upside as that is where the gap would be filled in.
The 8:30 AM open was 2432.75; about 10 minutes later it filled in the gap and then in another 15 minutes it cleared the Monday low of 2436.25, which would be a more conservative point for a long entry. The initial stop could go below the early day session lows, and the market proceeded to trend higher today, in a steady rally with shallow pullbacks.
These breakout reversal trades often work because often the initial move, in this case last night’s break, often end up being profitable for traders who catch the move in the very early stages. If traders try to get in late, they end up selling at a low or buying at a high (a Buying or Sell Tail in Market Profile terminology). As the traders who get the wrong way at high / low are often weak hands, they provide the fuel for the strong positive feedback reversal move, as we saw in today’s stock market rally.
Essential Guide for Futures Swing Trading
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