Early trading moved quickly to yesterday’s high and reversed. Then there was a drop to yesterday’s low, with no pullbacks in sight. I suppose I could have shorted the early peak as a test-of-top, but I didn’t. Then yesterday’s low provided enough support to run us back to re-test the high.
By the time we reached the intra-day high again it was starting to look like a large rectangle would form. But at around 8:50 Pacific time we broke out. Or did we? There was a beautiful divergence between price and the Stochastic oscillator that lead to the big move of the day. The reason seems to be a Philadelphia Fed announcement that was much worse than expected. The entry signal came a few minutes before the announcement.
But we didn’t know the news would be bad, so why would you really take the trade? Well, there was the divergence. And I just happened to be scanning several other markets at the time. Would it have helped to know that the NQ e-mini futures were making a lower high just then? What if I said that the ES e-min futures were just finishing a triple top? You say you want more? All making lower highs at that same moment were the YM e-mini futures, the NASDAQ Composite Index, and the SOX (Semiconductor Sector). Did I hear you say false breakout?
At 11:00 there was a nice pullback to resistance, combined with an overbought Stochastic, for a continuation move down. A trendline bounce gave you a nice exit.
Remember the context of your trade. Tuesday I mentioned the context of previous day’s trading pivots. Today it is the context of what the other markets are doing. Both are sometimes crucial to taking the correct action at the correct time.
