What Happens When Key Resistance is Broken

I’ve been discussing this concept behind the scenes but wanted to share a little insight with this morning’s example of broken resistance leading to a break-out (along with a great triangle example!).  Let’s take a look:

For the background perspective on why this breakout is important and somewhat unexpected, please see my post “SPY Rounded Reversal into Fibonacci Resistance” from last night.

We did get the down-move as expected from my bias in last night’s post, but the only way to profit from it would have been to take a ‘short-on-close’ or short sale ‘swing’ position from my mid-day post yesterday calling a ‘top’ and rounded reversal.

This gives us a good example of walking forward in real-time as to how price and expectation play out.

Both posts called for a down-swing to challenge a minimum of the $98.20 level, from which the rounded reversal began, if not a larger target as a best case scenario.

We did get a gap-down to this level (meaning the “Rounded Reversal” was not as smooth as I would have liked, but rather ‘violent’ in its descent to the target) and an immediate gap-fill up (I still love the gap fills) and then a pause at the overhead expected resistance levels.

The key to trading – as Mark Douglas reminds us – is flexibility along with an open mind, complete with “If/Then” statements and ‘fluid’ expectations.

Meaning, we should have expected the $99.40 resistance to hold, but been aware that quite a few eyes were likely watching this level and that there would have been a nice ‘pocket’ of stop-losses – ours included – above that level at different increments.

So the bias should have been “I expect price to hold resistance at the $99.40 SPY level, but in the event that price rises beyond that, many traders will be thrown off balance and will be stopped out, creating a possible powerful short-term momentum move up that I’d like to participate or ‘scalp’ as well.”

In this sense, if resistance holds, we make a nice profit short, and if resistance fails AND traders are stunned and forced to cover, we’ll take a stop-loss but consider flipping long in anticipation of a momentum move up.

The key to this logic is realizing that the thrust up was caused only partly by new longs flooding into the market, but also partly due to short-sellers – as frustrated as they are – covering what many felt was a sure-fire position.

We see this exact same “If/Then” logic and large thrust bars occurring after the famous July “Head and Shoulders” pattern (so many people were watching) trigger and then immediately fail.

In my experience – and in so many others’ I’m sure – trading is not about knowing the future, but anticipating two or three scenarios, picking one as dominant, and then knowing where each thought process is wrong and then anticipating the repercussions and how large groups of traders are likely to react.

What you’ll find is that some of the best moves occur when the opposite happens of what is most logically anticipated, almost beyond doubt.  The market just works that way sometimes.

Usually you’ll get a predictable ‘scalp profit’ when an expected resistance or support level is broken, but only if you’re aware of it.

It’s about maintaining an ‘accuracy edge’ with a ‘monetary edge’ and profiting consistently (not wild account fluctuations up or down) over time.

Finally, it’s about truly believing – as Mark Douglas explained that we should believe – that “anything can happen in the market!”

Corey Rosenbloom, CMT
Follow Corey on Twitter:  http://twitter.com/afraidtotrade