Following up from my educational update on August 20th, the very same situation unfolded on August 22 with an even more powerful outcome.
Let’s take a moment to see what happened and what we can learn from this similar situation:
Please reference the prior “Example of Playing Popped Stops from a Failed Retracement” update from August 20th for the full description of this set-up, logic, and what it means for the remainder of the trading day.
The main idea here is that a similar “Bear Flag” retracement triggered as price traded back to the falling 20/50 EMA confluence in the @ES (S&P 500) futures which allowed for an aggressive entry at 1,407.50 or else a trigger-breakdown (under the rising trendline) near 1,406.50.
Like the other examples of the two successful bear flag trades in the morning session, the target was a sell-swing back to the session low, or preferably just under the session low (exiting on the break above a reversal candle high off the lower Bollinger Band).
There’s one caveat with the two examples:
While the trade lesson from August 20th contained a new TICK and Momentum low, the third flag example above developed off a dual-positive TICK/Momentum Divergence.
Divergences reduce the probabilities of a successful retracement (and indeed this retracement failed).
The lesson is not to show you that retracement trades fail, but rather to reveal the shift in bias (bull/bear) after a retracement trade fails which often signals an intraday trend reversal.
Quite simply, after a high-probability retracement trade FAILS, stop trading in the trend direction. Instead, look for bullish trades that may develop in the new direction.
Here’s a “Color-Coded” chart of the full day which reflects the “Hard Shift” in bias after the failed retracement and breakthrough above the falling 50 EMA:
We’ll look at the good trade set-up that developed after the reversal, but for now, the chart above reminds us that there is often a bias (usually based on the prevailing trend) that suggests what types of trades (bull/bear) to take.
The morning session favored the Bearish/Sell side as was evidenced by two successful “flag” retracement trades.
When the third opportunity failed at 1:00pm CST, it revealed a hard shift in bias, initially to the neutral side but then immediately to the Bullish Side due to the power/strength of the impulse.
Yes, the impulse was related to the release of the Federal Reserve Minutes, but the idea is the same:
A failed retracement which leads to a break above the falling 50 EMA often signals an official shift/reversal in trend structure which changes the bias to the Bullish Side for the remainder of the session.
Though it was impossible in this instance to play the “Popped Stops” from the sudden, news-driven breakout, it was possible to get ready to trade the first retracement or first breakout that occurs in the context of a new bullish bias.
The Green Arrow reveals the initial Flag trade which triggered from 1,408 to 1,409:
Once again, the main idea is that a bullish bias – and eventual intraday trend reversal – developed from the FAILURE of the 1:00pm CST Flag to achieve its downward target.
The green highlight reflects the sudden shift at 1:00pm while the green arrow suggests the initial or “first retracement” flag set-up that triggered at 1:40pm CST.
If you missed the quick retracement/flag trade, then a Breakout trade (not labeled) triggered on the push above 1,411/1,412 which took price to a new session high.
Personally, I prefer retracement trades to breakout trades, but both set-ups triggered in the context of the new intraday bullish bias.
Failed trades don’t have to turn into disasters; instead, hear the message signaled by price and shift/adapt to the new direction accordingly.
Corey Rosenbloom, CMT
Afraid to Trade.com
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