Friday, July 20, 2007

Catching the Breakout Trade

Catching a good breakout trade can make your week. The start of catching this trade was actually at the beginning of the week when we saw that the indicators (advances/declines, new highs/lows, money flow, momentum, TICK) were not keeping up with the market's attempts to launch new highs.

We then saw that risk aversion owing to the subprime concerns was manifesting itself in a rising Yen (unwinding of the carry trade) and falling 10-year Treasury yields (flight to quality in fixed income). We could see such risk aversion pressure equities: people don't want to own stocks when they're concerned about contagion of debt problems.

All these factors came into play this morning. We started out (top chart) in rangebound mode as noted in my real-time Twitter comments on the market. (Last five comments always displayed on the blog). Note then how volume hit bids heavily as we moved to the bottom of the range on the heels of the rising Yen and falling Treasury yields. That told us that institutional investors were unloading stocks, and shifted us from range mode to bearish intraday mode.

The real takeaway is that it's valuable to coordinate the market's larger-term picture (how indicators have behaved over the last week or two) with intermarket observations (regimes) and a shorter-term perspective (range support/resistance; expansion of volume). It's not so much a matter of predicting what's happening as *understanding* it.


Mike said...

Dr. Brett,

I just want to encourage you with your Twitter comments. They are very helpful to me. I do go over the charts and the Tick chart at the precise times that you give, and thanks to you things are indeed starting to make sense.

Thanks much!

Brett Steenbarger, Ph.D. said...

Thanks so much, Mike; I'm glad the comments have been helpful. Interestingly, my own trading has been improved since doing the comments. They also focus me on what's most important. I appreciate the feedback; best of luck trading--