Two Things To Bear In Mind When Catching Intermediate-Term Breakouts

  • June 2, 2003
  • Rob Hanna


I had an interesting correspondence with a TradingMarkets member
recently about using day or swing trade entries to gain early entry into
intermediate-term positions. As many of you realize, I am a proponent of this
type of strategy. Catching intermediate-term breakouts can sometimes be
difficult, and if you’ve got a solid method to enter positions in anticipation
of the breakout, then you are that much ahead of the game.

That said, there are two things
I suggest you keep in mind when attempting to do this:


  1. If the market is moving in the direction of the
    anticipated breakout, then the odds of that breakout actually occurring are
    substantially increased.  Therefore you should only look to take early entries
    if the market is trending in the direction of your trade.  A couple of months
    ago, I would’ve suggested looking to enter shorts early.  Now I’d be inclined
    to longs.

     


  2. If you
    take an early
    entry based on a swing, or intraday pattern, place your stop based on that
    pattern as well.  For example, if you enter based on a Haggerty Slim Jim
    pattern, you’re stop should be placed a little below the low of the Slim Jim. 
    If you enter a trade base on a Landry Trend Knockout, then place the stop
    below the low of the knockout bar.  You should not employ an intermediate-term
    stop until the intermediate-term breakout actually occurs.

That was the
big breakout?

Sometimes, the best way to
guess the path that the market might take is to determine just how it could
screw over the most people.  Every technician in the world knew that 965 was an
important level for the S&P 500. People lined up their bets based on whether the
market could get through it or not. Shorts were placed by people as the S&P got
close to that key level. Buy orders were bunched and ready to pounce if the
number broke. This morning it happened, and with little more than a courtesy
pullback, it was off to the races until all the nervous shorts were squeezed
out, and all the eager longs were sucked in. Then it reversed.

Now, after all the hype, and all the volume traded today, the market barely
managed to finish above the magic number and in positive territory. Looking at a
chart you can see we are left with another ugly looking spinning top with a very
long shadow. 

 

So where do we go from
here? Well, the market already squeezed the shorts out, so now it might be time
to scare out those new, eager longs before attempting to resume its uptrend. If
the market does begin to head south tomorrow, and breaks under today’s lows,
then I think we will indeed get a pullback. I’ve marked on the chart three
horizontal bars. The first one represents the highs from mid-May. The second one
is the lows from last Thursday, and the third one is the 50% retracement from
the May 20 low to today’s high. You’ll notice they are all around
945-948.75. They also could all act as potential support.  This would be my
first target area for a potential pullback.  Is it deep enough to scare out the
newbie longs from today?  I hope so.  (If not, the pullback might be pretty
deep.)  Then maybe we can move higher…once the shorts and the longs are both
declared losers. 

Until Wednesday,


Rob Hanna

 

 

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