A breakout from a trading range is an attempt to create a trend and its failure is a move back into the trading range. A successful breakout leads to a trend. Similarly, a successful failure to resume the trend leads to a trading range. Today, b15 and b28 were failures to resume the trend and b67 was a successful resumption of the trend.
After every breakout, the trader needs to decide if he will fade the breakout or enter with the breakout on a pullback. In general, when in a trading range, a trade on the failure of the breakout is more likely to succeed and certain important signs are needed to trade with the breakout.
The signs are:
- Breakout is strong (i.e., half or more of the breakout bar is beyond the break point)
- Strong close
- Second attempt to breakout
- Poor attempt to fail the breakout
Lets look at these one by one:
- Strong breakout: b27 and b67 were both very strong breakout bars, but b67 was more than halfway above the break point. Even though b27 was less than halfway out, there was a good chance that a 2 or 3 legged pullback could give a second attempt up. On the other hand b10 was a weak breakout with weak close.
- Strong close: A strong close beyond the breakout point indicates that there were insufficient fade orders at the break point. A weak close followed by a deep pullback (such as b29-46) indicates possible failure of the breakout. A weak close such as b10 indicates fade orders were waiting and a failed second attempt (b15) is likely to seek the other end of the range.
- Second attempt: Second attempts are stronger than first attempts and second attempts of strong closes usually are very successful. An fBO (b28) that fails to take out the other end of the range (b15 low) should be treated like a deep pullback and is a possible trend break (HL after HH). This is especially true after a fL2 such as the one at b50.
- Poor attempt to fail the breakout: b11 and b15 are strong attempts to fail the breakout. Usually, when the first failure is pronounced (b11,12), the second will usually go much further (b15-b27). If the bar after the breakout bar is a reversal or inside bar with a strong close such as b28, there is a high probability of at least 2 legs down, possibly deep. If the attempt to fail the breakout is poor such as b67, and it does not trigger, the chances are very high that the price will seek a measured move of the prior range (b28-45 met at b79).