Like every Sunday, another read - bigger picture from the perspective of short term trader. This blog today have three parts: charts, some education and trading setups examples. THEME of this Weekly blog are false breakouts.
Buckle up, lots of charts today, but first - let's see what economic data is coming next week:
With FOMC and ECB Statements done, and FAANGMAN stocks Earnings reports done - we are heading into the "NFP Week", meaning Non-Farm Employment change being the most important data. Big Earnings week in Germany, since ELEVEN DAX30 Component companies will report, Siemens and Linde the most important.
After two weeks of boring ranging activity, we finally got some action on last two days of previous week, with a selloff and some widely noticed weekly candles on indices. Moving on to charts, and what is the better time then NOW, when April is ended - to see Monthly charts as well?
PART 1 - CHARTS
Chart #1 - SPX Daily / Weekly / Monthly
False break (upthrust) above 61.8 fib retrace, and resistance level. Price below DMA200. Bottoms of prior two weekly candles are range bottom, and a Support level.
Chart #2 - NDX Daily / Weekly / Monthly
The strongest of all US indices, NDX is above 61.8 fib of the down move, good size topping tail on weekly candle, the same false break above resistance like SPX, but check the April monthly candle. Nothing all that bearish there, on a Monthly chart - so far.
Chart #3 - RUT Daily / Weekly / Monthly
False break above halfback on RUT, and a backtest of broken range. Huge wick on the Weekly chart, overall weak look on ALL timeframes, Monthly included.
Bigger downside possible on US indices on breakdowns of Support levels:
SPX: 2720/30
NDX: 8330
RUT: 1180
How does it look?
Just compare March and April candles on NDX, with the ones on RUT. Divergence on US indices, and best directional moves we usually get when all of them are aligned - ALL weak, OR ALL strong.
Chart #4 - DAX Daily / Weekly / Monthly
"Look above and fail" on Daily chart. Price made a breakout from range #4, but then failed to fill the gap above and got rejected. Rejection tail on Weekly chart - on the FIRST test. On Monthly chart, we can observe WHY level 11,280 was the only prominent level inside that big gap. Even better, on the next chart:
Chart #5 - FDAX Daily
On Cash 11,280 - on Futures 11,285. Axis line. Yet another false break. Premarket high from Thursday, April 30. (Friday - May 1st was a non-working day, Labor day holiday).
OK, so what is this with all this false breaks, and what are those?
So we got this bearish false breaks now everywhere. Weekly shooting stars, or rejection tails, or hammers... Note that SINGLE candle look doesn't mean all that much, BUT can mean a bit more IF it is on the right location. These ones are all false breaks above resistance. So, potential for SOME more downside is there, but how much? Can "THEY" make a retest of March lows, maybe even lower lows? THAT is unknown.
Bottoming process looks like this:
Chart #6 - SPX and NDX Daily, bottoming process of 2009
This is the chart I have used in Weekly Analyses from March 29, 2020. School book double bottoms are like these ones - lower lows with bullish divergence, AND - this is muy importante: with lower VIX than the first low.
Stay open for test of lows, stay open for just short term weakness in indices. Tempo and momentum are required for more downside, fast tempo and strong momentum (NOT the kind we get on Thu/Fri but better then that), breakdowns of supports. Without that, markets can make just another range, and grind higher. Start of futures session on Monday will give us some clues, and RTH open as well. Keep in mind S and R levels, find good inflection points on your charts, since good trading location is your best trading edge.
PART 2 - EDUCATIONAL TA STUFF
Trading is complex. Make no mistake about that. It can be simple as well, IF market cooperate. Let's observe some cartoonish examples first.
"Chart" #7
Not so hard, right?
But then...
"Chart" #8
Real life example now.
Chart #9 - ASX 200
Easy-peasy-lemon-squeezy.
But then...
Chart #10 - ASX 200
False breakout (Upthrust) and after triangle was broken to the downside, waterfall started. Breakdown of former Support level - acceleration down.
LEARN. False breaks are some of the BEST trading setups. Very doable on smaller time frames, like we can observe in the next segment.
PART 3 - SIMPLE TRADING SETUPS
Let's observe three simple setups from futures. Five minute charts, context and lines.
Setup #1 - FDAX Short on Pullback
Thursday, April 30th. Market going down from the start of futures session. After disappointment from ECB Statement and Main Refinancing rate, price making a breakdown below S level, then pullback to it. Classic B-P-C. Break-Pullback-Continuation. That, by itself - should be enough for you to press SELL button. But this Setup was even better, it had two additional reasons to take this short. FIRST test of down sloping trendline (remember that you need two anchor points to draw a trendline), AND pullback was 61.8 fib retrace of that news driven down move.
NEXT
Context heading into Friday: Weak Thursday on all indices, DAX is closed on Friday, US indices having gap down. Weakness across the board.
Setup #2 - ES_F Short after the open
Friday, May 1st.
Weak market that opens below Resistance, and then test R level. Short.
As late Mark Douglas said: "When pattern presents itself, there is nothing to think about, take the trade, because you have an edge."
Additional short opportunity was later - on backtest of ONL.
Setup #3 - NQ_F Upthrust over ONH
In bullish legs - mark my words for this - the opposite setup is quite often, and one of the best long setups: false breakdown below ONL. BUT - CONTEXT on Friday was different, market was weak, carried weakness from Thursday, made a gap down. Setup was false breakout, upthrust, over ONH. Sell on a drop below ONH. False breaks of overnight ranges have targets to the opposite end of the range, OR when they are really big, then to half of the range.
Okey-dokey - that is it for this Sunday.
In short term trading it is very important to properly understand context heading into every day, to know from which side wind is blowing - who has the short term control, and which side will be forced to liquidate IF and WHEN market hold above or below a certain level. What is the level of volatility, what can we expect from any particular day, what market already done in premarket session, what possible setups can be available, and so on... the things that we constantly learn in the DAILY DOSE OF DAX.
Cheers, StrayDog