Friday, March 20, 2009

Catching the Breakout Trade: Recognizing Rejection of a Key Price Level

Here we see today's S&P 500 e-mini (ES) futures market (blue line) plotted against the day's volume-weighted average price (VWAP; pink line) and the previous day's support level drawn in red.

Notice that we traded around that resistance level for much of the morning in a range trade, but could not sustain rallies above VWAP and largely remained below the day's opening price.

As noted in the Twitter post just prior to the noon CT hour, selling picked up along with volume and volatility, as we rejected both the resistance level and the current VWAP as an estimate of value. This breakout from the morning's range led to a significant downmove that took us near the S2 support level.

Differentiating moves with normal volume and volatility that meander around an average price from moves away from that price that are accompanied by expanding volume and volatility is key to recognizing breakout trades.

Tells that I did not emphasize in my Twitter posts that deserved greater attention were the inability of the market to trade above its opening price and the consequent downward slope of VWAP. Even with extensive preparation, there are always things we miss; things we need to work on. That's one of the things that keeps the trading game endlessly challenging.