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.