When a Breakout Setup Ignites a Short-Covering Rally

In the previous case study, we reviewed a bullish reversal setup we nailed on Friday, February 4, 2022. That morning ES-mini and NQ-mini hit a triple support and after bears failed to break under that support twice, bulls stepped in and started an up cycle. Let’s review two long trading setups the Monkey Cycle Trader Indicator found in the afternoon.

In the previous case study we discussed that by 11–40 AM on Friday, February 4, 2022 bulls felt confident that bears failed to break under the support on 240 min timeframe after two failed attempts. Trading stocks is a zero-sum game. In each trade there is a winner and a loser. If bears fail to break under support, bulls step in and start pushing stock prices higher making bears cover their shorts.

By 11–49 AM a micro rally showed signs of exhaustion and the Monkey Cycle Indicator detected completion of a micro up cycle on 3 min timeframe:

3 min charts of ES-mini, NQ-mini, Feb 4, 2022

It was a very important moment for bulls. They defended a triple support and attempted to start a rally driven by up cycles on 240 min, 30 min and 3 min timeframes. The next hurdle for bulls was to produce a breakout on a micro timeframe to solidly confirm completion of a down cycle and start of a large up cycles on higher timeframes:

Until bulls manage to break over a cyclical resistance on a micro 3–5 min timeframe we cannot expect acceleration in a rally and price may keep bouncing in between support and resistance. If you are familiar with Elliott Wave theory, the first move up off an important support is always a weak wave i up that can be followed by a deep wave ii down. A really strong move up starts only in a wave iii up when price breaks out over the previous high.

For another 30 minutes bulls kept trying to break over the micro resistance on 3 min timeframe but could not crack it:

3 min charts of ES-mini, NQ-mini, Feb 4, 2022

This is what makes trading breakouts very difficult. You always feel tempted to go long in anticipation of a breakout because you feel like breakout is imminent.

Finally, bulls managed to break over the resistance:

3 min charts of ES-mini, NQ-mini, Feb 4, 2022

Please note that tight consolidation right under the immediate resistance. Bulls first built a base for a breakout and this is why the following attack turned success.

In just twenty minutes ES contract gained 20 points and NQ contract jumped by 55 points:

3 min charts of ES-mini, NQ-mini, Feb 4, 2022

When price breaks over resistance and you missed that move it does not make sense to chase the price. You should always keep your head cold and wait for the next favorable trading setup to manifest itself.

The rule of a breakout says that every initial jump over resistance is followed by a pullback or at least a flat consolidation.

By 1–38 PM both, ES-mini and NQ-mini stopped moving higher and started to consolidate:

3 min charts of ES-mini, NQ-mini, Feb 4, 2022

This is when a micro down cycle kicks in. When Bears feel like bulls took pause, they step in attempt to reverse that rally and push price back under the broken support to turn that whole rally into a bearish failed breakout setup.

But in majority of cases bulls stop that first pullback on a much higher level in comparison to the recently broken resistance:

At 2–20 PM EST when the indicator detected completion of a down cycle that only managed to make a higher low it drew a new green cyclical support and the “Strong Buy” signal:

3 min charts of ES-mini, NQ-mini, Feb 4, 2022

That is my favorite long setup. When a breakout over a resistance is followed by a shallow pullback what normally follows is an accelerated part of a rally that either retests the previously made high, or push price to a higher high.

And that setups delivered an exceptionally strong short-covering rally:

3 min charts of ES-mini, NQ-mini, Feb 4, 2022

In just twenty five minutes ES contract added 25 points and NQ mini added 75 points!

The great thing about the Monkey Cycle Indicator is that not only it finds great entry points in attractive trading setups, but it is also capable of catching tops of rallies:

3 min charts of ES-mini, NQ-mini, Feb 4, 2022

The indicator detected signs of exhaustion in that strong rally at 3–15 PM EST. And it immediately printed a new cycle resistance and produced the “Sell Long” signal. That signal nailed the top of that manic short covering rally.

As you can see from that chart, the following 30 minutes price bears wiped out the entire afternoon rally!

That topping signal could be used as a short setup which I personally did by loading on bear triple ETFs like SPXS and SQQQ. The quick and sharp drop produced even bigger gain for me than the long position did in the course of the afternoon rally!

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Important Disclaimer

Neither the author nor the publisher of this article is registered as an investment adviser nor a broker/dealer with either the U. S. Securities & Exchange Commission or any state securities regulatory authority. Readers of this article are advised that all information presented here is solely for informational purposes, is not intended to be used as a personalized investment recommendation, and is not attuned to any specific portfolio or to any user’s particular investment needs or objectives.

Trading stocks, options, or futures carries a high level of risk, and may not be suitable for all investors. Before deciding to trade, you should carefully consider your objectives, financial situation, needs and level of experience. The author provides general overview of trading methods that does not take into account your objectives, financial situation or needs. The content of this article must not be construed as personal advice.

Past results are not indicative of future profits.



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