[DbPhoenix]

I'm revisiting this thread because of a subject which comes up on a regular basis in chat, that of the breakout, specifically a certain kind of breakout.

Wyckoff was not a fan of breakout entries. Neither am I. He advocated entering inside the crest of an upmove and the trough of a downmove. So do I. He felt the breakout carried the highest risk of the entry options, in large part because one would be so late. So do I.

But I've noticed for some time that there is a certain kind of breakout that is as close to fade-free as one can hope for in this world. Tolkien in LOTR characterizes the quiet before the onset of war as "the deep breath before the plunge", and during one of my regular visits to Middle Earth, this phrase struck me as the perfect description of how price behaves in this breakout.

Clearly, however, there are two problems in using this phrase: one is that price breaks out to the upside as well as the down, so "plunge" is not always the most accurate choice to describe the action; another is that abbreviating it results in "dbp", which creates unnecessary confusion with my name.

So I call it the "WTF?!?", since this is the knee-jerk reaction of those who see it and don't know what they're looking at.

The WTF occurs when price has been drifting along, minding its own business, not doing much of anything, usually in a sideways congestion, but sometimes in a slightly upward or downward meander, lulling everyone into a doze. Then, out of nowhere, price plunges, or rockets, at the same time volume pours into the market. The trader thinks "WTF?!?". There is a brief hesitation (the "deep breath"), and then the bottom falls out (the "plunge"), or the afterburners kick in, and the trader watches price leave without him. But if the trader knows what he's looking at and keeps his wits about him, and if the entry is taken at the right time, it tends to be a very clean one, and he can segue into management mode almost immediately.

They don't come up so often that one sees them all the time, but they come up often enough to warrant at least a little space in the back of one's mind. An example came up today in the NQ.

Here price was in a generally sideways drift. The angle is slightly downward, but each swing pulls well back into the previous swing rather than stair-stepping; there is no concerted effort to drive price downward.

Then price drops out of this straight down, accompanied by a spike in volume.

There is a hesitation at that point (between 23 and 24) which may last for no more than a few seconds. Here one can set his sell stop just below this hesitation with a very tight stop. If this is a shakeout, his entry will not likely be triggered (if it is triggered, he can be out for little or no loss). If it is instead a breakout (or, more accurately, a breakdown), then the trader is in it, with very little risk.

I haven't kept an archive of these examples, so I'll add a few as they come up. In the meantime, it will benefit the Wyckoff trader not to assume that every short, sharp shakeout or thrust that's accompanied by a spike in volume is in fact a shakeout or thrust. It may in fact be the mirror image, and continue in the direction that the apparent shakeout or thrust has begun. Playing it well, however, will require the trader to follow the price action, i.e., a 1t chart, not just a summary of the price action (from the initial drop to the continuation in this instance was less than a minute).

Additional Example: Friday, Sept 25

After having said above that these don't come up so often that one sees them all the time, there was at least one good example on Friday and another today (Monday, the 28th). Perhaps traders are becoming more jittery.

Friday provides several examples of what aren't WTFs. This is good. Seeing these may help prevent the trader from being dazzled by the glitter rather than wait for the gold.

Support on Friday was in the 1698-99 area. Note that once it settles into that level, there is a high volume bar that is unaccompanied by a drop below S. This is followed by another high volume bar 15m later that is accompanied by a breakout above what appears to be R. But there's no follow-through. Price lingers between 1701.5 and 1702.5, but it never gets past that. Hence, no trade. There is then a drop below S, but unaccompanied by volume (first arrow). Then another, but still no volume (second arrow).

Finally, there is a drop below S and also an unmistakeable rise in volume. This is the one worth waiting for.

This lingers around 1697.5, and a short just below here enables a very tight stop.

There are then one or two "WTFs" that technically qualify, but which are not as attractive as the first entry, i.e., the best entry (best because one of the chief advantages of the WTF is the element of surprise; once it's occcurred, there no more surprise).

A couple of minutes after the above entry, you have another plunge accompanied by high volume, but, as mentioned above, the element of surprise is gone, and price rebounds higher on this entry than on the first, calling for a wider stop. Not only that, but price piddles around for over 15m before resuming the downmove. Since one's entry price is hit repeatedly, this can be wearing, particularly since buyers appear to be offering support at around 1204.

Finally, there is another plunge accompanied by high volume just after 1215. But the real volume comes in on behalf of buyers trying to support price here. And since the next level of S happens to be 1690, there are a number of risks involved in taking a short trade at this level, this late.

Not all WTFs, then, are created equal. The best are those which come as a surprise. In confusion lies opportunity.

[forrestang]

Breakouts have freaked me out for a while too.

Watching for the breakout, is the entry placed prior the breakout, or is one waiting for a confirmation via volume to show interest in the move down?

[DbPhoenix]

Originally Posted by forrestang »

Breakouts have freaked me out for a while too.

Watching for the breakout, is the entry placed prior the breakout, or is one waiting for a confirmation via volume to show interest in the move down?

If you're referring to my post above, there's nothing to watch for, which is why it's call a WTF, and there's no time to wait for confirmation. I wouldn't classify it as a beginner's setup.

[forrestang]

I have highlighted an area the price moved to right after the open.

Just based on a micro entry perspective, is there anything here that looks like a good entry? IMO there seems to be no serious expansion in Vol, although price was moving rapidly into it.