Although the eMini S&P futures had a wide range on Thursday, the doji bar and Friday’s release of the monthly employment report meant we could still anticipate a breakout move after the NFP report. By waiting to trade after the 8:30 AM open, we avoided a downside fake out in the premarket trade.
Breakout setups are one of my favorite patterns to trade. (I wrote a guide showing how to identify and trade them; you can request it HERE.) I especially like to look for breakout trade opportunities after a major report release, as they can cause traders to make large, sudden changes in a market’s “fair value”, which results in a large directional move as the market moves to its new fair value level.
In last night’s edition of Swing Trader’s Insight I suggested we look for a breakout move today, anticipating a move after the employment report. This trade was different than a normal breakout setup, which normally is preceded by a narrowed trading range and price compression. A narrow daily trading range means that the previous session high and low are relatively close to the next day’s trading range, giving us close in price levels to use for breakout trade triggers.
Thursday’s wide range meant the previous day high and low were relatively distant to use for breakout setups –we want to use close in support and resistance for entry triggers. In instances like this, I like to use overnight highs and lows; they serve the same purpose (defining the boundaries of a trading range) while being closer to current price level, making them earlier entry triggers.
I generally don’t trade stock index futures before the 8:30 AM open; I have two reasons for that. First, by waiting, the market sometimes gives us highs and lows to use as reference prices, especially in the emotional trade after a report release. Second, this emotional trade often causes whipsaw moves, which tend to be difficult to trade and often just end up picking your pockets.
Today’s action showed the wisdom of waiting until 8:30 to trade. When I wrote the morning note for STI, I originally suggested we first watch 2616.75, the session low at the time, as the first downside breakout level. However, between when I sent out the morning note (7:55 AM) and the open, the market took out that low and traded down to a session low of 2612.25, just after 8:30. I would have taken a short had the 2612.25 low been taken out later this morning but the market rallied instead.
In this morning’s STI comment I suggested we use 2630 as our first upside breakout level, as this was just above the post- NFP high of 2629.50. This was broken around 9:05, triggering our first long entry. About 20 minutes later it rallied above the Thursday high (2636.25), which is the standard upside level fort a long breakout trade entry.
The failed downside moves of Thursday and early Friday morning gave the rally fuel this morning. 2655.87 was a 50% retracement of the selloff from the 18 April high, this was both a primary rally objective and a pivot point to extending the rally. The one way action of the market today shows the value of trailing stops rather than picking trade objectives, as the market has moved higher over the remainder of the session.
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