Thursday, December 11, 2008

Making the Breakout Trade: Co-ordinating Time Frames

Selling the S&P futures this afternoon was the kind of trade that can make your week; so far, it's helped mine. If you click on the top chart (ES futures, 60 minute bars), you can see the repeated support at the 885 area. I haven't been impressed with money flows and didn't like the action in financial and housing stocks today; it seemed that the only thing holding the market up was the commodity-inspired strength among energy issues.

If we look with a little more granularity in the bottom chart (ES futures, blue line; cumulative NYSE TICK pink line), you can see that *before* we broke through the 885 area a little before 2 PM CT, we had already established a downtrend in the cumulative TICK for the day. That suggested that the highs would not hold and that we had a decent chance of breaking below the 885 support.

When that break occurred, it was on very weak TICK, meaning that a large number of NYSE shares persistently traded on downticks. This is characteristic of valid breakout moves. One-minute volumes in ES also picked up significantly on the breakout, suggesting that institutional participants were unloading their shares.

What's important here is the coordination of time frames: the identification of the range market on the 60-minute chart; the recognition of the downtrend in TICK at the intraday level; and the confirmation of the breakout with the one-minute TICK and volume levels. I generally find that my best trades occur when I develop my ideas at a longer time frame and then execute them on a shorter time frame. The big picture provides the idea, but it pays to wait for the short-term action to get you into the trade--and then keep you there.


Jorge said...

Dr. Steenbarger,

You have repeatedly explained the basis of your trades and what you look at (TICK, volume at price, etc.), but I was wondering if you could show us *how* you look at it. I'm not looking for your entry points, rules or anything like that, I'm simply interested in seeing how you - with your background in proprietary trading firms - arrange the information visually on your screen.

Could you please post a composite of your trading screen/s? (Without your trades, account, personal information, etc. of course).

Of course, I'd be happy to share mine.

Best trading,


Marco said...

Dr. Steenbarger, have you by any chance explained in some past columns how you build Cumulative Tick? I have Bloomberg, but I am not sure how to build it. Many thanks,

Brett Steenbarger, Ph.D. said...

Hi Jorge,

Thanks for the suggestion; hope my subsequent posts on the topic are helpful.


Brett Steenbarger, Ph.D. said...

Hi Marco,

I am putting a series of posts together on the topic at present; thanks--