In this morning’s comments for Swing Trader’s Insight I pointed out that the T Bond futures had a breakout setup. It broke out to the upside and made a steady rally over the session, giving a good slow motion (for a breakout move) trade.
The pattern for today’s breakout signal wasn’t a traditional range contraction / volatility squeeze. Rather, the nearly identical trading range and opposite direction – open < close on Monday, open > close Tuesday showed the same kind of indecision that is indicated by range contraction.
As with any breakout setup, we anticipate that the trendless conditions of the setup will result in a directional move as traders buy or sell to move the market toward a new “fair value” level. I like trading these breakout setups because we don’t have to predict which way the market will move. Rather, we let the market decide which way it wants to go and we go along for the ride.
For today’s T Bond breakout trade, the upside level to watch was the Tuesday high / double top at 154-08. As it was a double top, it was a significant price and a move above it could start a positive feedback cascade move higher.
The trigger level was first taken out at 7:30 AM. It then dropped back down and held exactly at the last low of 154-02. Placing stop loss orders just below here was the logical level to limit risk.
The bond rally gained steam as the session wore on, helped higher by the stock market selloff. Patience was rewarded as by 3 PM they reached the Fibonacci retracement level at 154-31 (see the daily chart).
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