The Classic Failed Breakdown Trap

• Posted by Robert Sinn
• on June 29th, 2012

One of my favorite trade setups is the late day failed breakdown – the final 90 minutes of yesterday’s trading session was another textbook example of the power of this setup. Yesterday at 2:30pm markets were under heavy pressure and EU leaders along with their armies of assistants were locked in negotiations attempting to form some consensus on the way forward. With decisions that could mean tens of billions of dollars to global financial markets it isn’t far fetched to imagine that someone in or around these meetings will know something and leak it to market participants. A simple text message “Merkel is willing to ease her demands” would suffice – as they say ‘someone always knows’ and their footprints are usually found in the charts:

Click to enlarge

While I wasn’t quite as sagacious as others who held longs from yesterday’s lows overnight, I knew that this was not a market to be short overnight after the powerful buying into the close. While the expression “the market fools the majority most of the time” may be trite to some, the fact is that it is true – yesterday’s early afternoon weakness undoubtedly caught the majority leaning the wrong way and those who were stubborn and didn’t cover into the close woke up to a painful lesson this morning.

 

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