The “Strong BUY” Trading Setup: How to Trade a Breakout
When bulls break over cyclical resistance and switch into a trending mode
Previously in lesson 1 and lesson 2 we reviewed several real-life cases when bulls got stopped by resistance levels. Sometimes they managed to overshoot resistance, but those spikes were short-lived and a new down cycle eventually managed to push price back under broken resistance. In this lesson we will study cases when an uptrend accelerated its move up, and bulls managed to produce a sustained breakout.
You can watch the video tutorial here.
In the lesson one we concluded that price can keep moving in one direction in zig-zags, bouncing from support to resistance and back to support:
That 240 min chart of QQQ shows an uptrend when bulls kept pushing price to new higher highs with every new up cycle. Every upcycle started once a new cyclical support was printed and lasted until a new red resistance was printed.
Bulls managed to significantly overshot the cyclical resistance in July 2017. When bulls overshoot resistance the broken resistance turns into support. Even a strong move up will always be finished by bearish reaction. An up cycle is always followed by a down cycle. Once bulls break over resistance we start carefully watching if bulls will be able to stop a new down cycle over that broken-resistance-turned-support.
In July 2017 bears managed to push price back under the broken resistance and doing that they did not let bulls to switch from a cyclical mode into a trending mode.
We can see that every down cycle bears tried to turn the price down but they could only push price to a higher low. All went well for bulls until they failed to make a higher high in early October 2017 and this is when bears finally managed to break under the previous support and make a lower low.
Let’s look at 240 min chart of QQQ for the period March — June 2017:
In April bulls slightly overshot the resistance but almost immediately dropped under it (see the point 1).
Since mid April an up cycle kept pushing price higher and higher until it finally managed to climb over the resistance (see the point 2). That move over the resistance could have been a brief overshoot but bulls kept pushing price higher until the rally reached some top in mid May (see the point 3).
This is why it is not reasonable to bet money on assumption that a new resistance will stop an up cycle. In rough estimation, a cyclical resistance will be able to stop bulls only in 50% of cases and in other 50% of cases bulls will slice through that level. In the previous lesson we discussed that it is especially dangerous to short at resistance levels if the market has been making higher highs and higher lows.
We concluded that when the price keeps making higher highs and higher lows we should focus on long trades and avoid shorting the market until bulls show signs of exhaustion and finally fail to make a new higher high in the course of a new up cycle.
Based on that conclusion we even coded a special type of signal to alert a trader about an attractive long opportunity when the market makes a pullback to a higher low. And in that case the algo would give us a great entry point:
As you can see on the 240 min chart of QQQ the algo suggested a long entry in mid May 2017.
Now let’s come back to the taht breakout bulls managed to make early May 2017.
After bulls manage to break over resistance the most important question becomes how deep will be the following downcycle. If bulls manage to stop bears from breaking back under resistance and start an up cycle from a new support located over the broken resistance that confirms that price broke into an uptrend mode from a cyclical mode. That tells a trader that he deals with the strongest part of a rally. In Elliott Wave theory that part of the rally is considered the heart of the rally, wave (iii) of 3. Under the modified Harmonic Elliott Wave theory that move over resistance is considered subwave C of wave 3 up.
The main implication for trading is that a pullback that follows a breakout over resistance and finds support over the broken resistance is an attractive long setup. The strength of the underlying bullish trend makes this pattern a high probability winning trading setup.
The MONKEY Cycle Trader Indicator can detect such setups in real time. All you need to do is activate that feature in its settings:
The algo caught two great entry points in QQQ on Mar 22, 2017 and May 19, 2017:
The indicator may also suggest exit points for that type of entry. To activate that feauture check the box “Show Sell Signals”:
The algo would catch the moment when a cycle up is about to top:
Please note that the indicator also draws thick red vertical lines at exit points for longs initiated at that specific “Strong Buy” signals. I can call that “Strong Buy” signal my favorite one because it is probably the most reliable signal produced by that indicator.
Let’s look at several long setups produces by that signal in 2021:
The indicator caught two nice runs on 60 min timeframe in SMH (semiconductors ETF). The indicator teaches you to become a patient and disciplined trader. Do not even dream about been able to trade every turn in the market. To make money in trading you first need to find some edge, to find a repeating pattern that in more than 60% cases produces some expected result. And then you need to keep trading it on and out. And you only trade when your find the setup that has proven track records.
You could say how I am supposed to making money if that instrument delivered two long setups in two months?
Well just switch to a short term timeframe like 5 min and you will see much more opportunities:
Do not forget to activate another reliable setup we discussed in the previous lessons called “Buy PB” and you will see even more opportunities for good trades:
In the next lesson we will review several cases when bears managed to break under a cyclical support and turn a down trend mode on.
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