SPX Breaks Out A Two Week Range, Then Sputters. Breakout, Or Fakeout Now? July 21 Plan

NOTE: This is a resend of the newsletter for Monday July 21st, originally sent out Friday at 4pm, for those who did not receive.

This last couple weeks (but this week in particular) has been Technical Analysis 101. I frequently say that trading is simple, but not easy. Its simple in the sense there is not many moving parts; my system has a few pieces that repeat over and over. Its not easy however, because it takes the discipline to tune out all the noise that is irrelevant to those pieces, and follow a disciplined plan. For me, these pieces are largely my core setup (the Failed Breakdown) and the context that setup occurs within is given by what I call the market cycle. This week demonstrated both beautifully, and it gave us a massively lucrative week.

The last few days, I’ve spoken about what I call the market cycle in ES, in particular pertaining to uptrends (which we have been in since April 6th). ES spends about 75% of the time over the last 100 years in an uptrend, so if you are interested in trading it, you need to understand it well. Specifically, ES does two things: About 90% of the time, ES consolidates. I call this “Mode 2”. This is rangebound price action, that forms a chart pattern. The other 10% of the time, it trends. I call this “Mode 1”.

We’ve seen this cycle over and over since April 6th. For the two weeks prior to June 23rd, ES was rangebound mostly between 6081 and 5978. Pattern - as readers know - was a bullish descending triangle. It broke out June 2rd. Two weeks of consolidation typically lead to two weeks of trend, and as readers know my target for this breakout was ~6325. We put in 10 green days in a row, and we hit that on July 2nd. Since July 2nd, ES had returned into Mode 2, and we had spent the last two+ weeks inside a new consolidation. The pattern? As stated daily, its been an ascending triangle.

I confirmed this at 4pm Tuesday: “My general lean is always to defer to the trend. As long as the triangle support holds (or failed breakdown and quick recover), ES can work back up the structure with 6301 being 1st target. Above there, its back to 6309, 6324, then 6333 triangle resistance.” When it comes to actually trading these patterns though, we need to use a setup, and for me, that means Failed Breakdowns. Failed Breakdowns are also how instiutions accumulate, and I just follow them. What did we see on Wednesday? Exactly what the excerpt above suggested: We put in a massive Failed Breakdown of the 6271-68 triangle around 11am, sold to 6241, trapped those bears, and we got to triangle resistance at 6333 by Thursday, and broke it out.

For today, bulls would need to defend this breakout. My lean was they would, staying “My general lean is always to defer to the trend and today, ES broke out of its two week ascending triangle which has been 6333 to 6279. Ideally, ES can backtest some of today’s breakout zones (6333, 6311/01 lowest), but as long as they defend momentum remains higher with 6349, 6357, 6372, then 6378 next batch up.” We back-tested 6333 by 10:30AM, and due to OPEX induced chop, ES spent the whole day there.

Decision time for ES. Will the breakout hold next week and rally, or is more downside needed? In today’s newsletter I’ll talk this, I’ll do a deep dive into the sequence of Failed Breakdowns that produced the monster 100+ point leg up we saw from this weeks 6241 low to this weeks 6340+ high. This was provided to readers in advance, and got us long for the week and was an example of what I call a “double dip” Failed Breakdown which refers to when price puts in back-to-back failed breakdowns. This indicates extreme accumulation going on, and tells us a large fund just went “all in” and we should follow. Finally, I’ll discuss the actionable plan for Monday.