How to Buy E-Mini Futures When They Break Support
10/01/2010 12:00 am EST
As a trader, you have to continuously adjust to market conditions. The market is grinding higher, which is very similar to last year when it seemed to go up day after day for no logical reason. We have been back in that pattern the last month, and many of the similar trade set-ups are working.
Buying breaks of support is one of the best set-ups to look for when trading the E-mini. There is a typical spike low or multiple spikes in a cluster after a break of support. This tells you the market is very likely to rally. I typically like to buy after the market closes back above support on a spike bottom and the high of that bar is taken out.
The market usually has a powerful rally after the turnaround. There will always be traders who will sell a break of support, which fuels the rally as they cover. You know the computers are going to be buying since this pattern has worked time and again. Other daytraders will also step in to buy because they know this is a very good risk/reward setup and they add to positions along the way.
In the example above, the ellipse shows where the market broke support of the lows on the triangle formation. In reality, you could say the market actually held support, but we want to focus on the specific numbers where there is support. The market actually had an initial bounce on the first bar that broke support, but continued to fall on the next bar. Some traders jumped the gun after the initial bounce and bailed when it sunk back below support.
This was an excellent set-up with three bars holding 1136.50 and three bars meeting resistance at 1138.00. The third bar is shorter and signals the market is ready to break higher. The trade is to buy one or two ticks above 1138.00 and put your stop one or two ticks below 1136.50.
It is a good habit to scalp out a profit on a portion of the trade and let part of it run in set-ups like this. Whenever I see a series of bars on the five-minute chart with spikes like this, it is a good indication the bulls have regained control of the market and it is very likely to rally. Actually, these are small spikes compared to some we have seen in recent weeks. Eventually, we will go through cycles where these set-ups are not as profitable, but you have to use them until the market dynamics change.
By Chuck Kowalski of FuturesBlog.com