Pivots, Patterns, and Intraday Swing Trades: Derivatives Analysis with the E-mini and Russell Futures Contracts, + Website

CHAPTER 13

Pre-Breakout Pause Pattern

The Test-and-Reject Model sometimes comes with a recognizable reversal pattern, but sometimes not. And even when it does, breakouts are fraught with the risk of whipsaw and early breakout failures. There is a very small and subtle price trigger that can form just prior to a breakout from a larger consolidation pattern. If taken as a trade entry device in conjunction with an incremental contract exit strategy, the risk for the overall position can be quite small.

Consolidation patterns by definition recognize an inability to trend. Some simply lack commitment and reflect a low open interest, and produce a tendency to drift. The pattern simply runs out of gas as price makes the trip from one end back to the other of its own range. But other patterns are more like coils. The range formed by the pattern in question has seemingly been built by a group of committed investors who have opened sizeable positions with breakout expectations, reflecting increased open interest, but to opposing trend outcomes. A Pre-Breakout Pause Pattern is simply a smaller gesture of the same price structure but in greater compression, and acts as a potential trigger to break free of the larger price consolidation.

Once the pattern in question is finally triggered, those traders positioned for a breakout at the other end of the pattern for the opposing trend outcome are stopped out. This stop-out level of those caught in the wrong direction can coincide with pressure ...