CHAPTER 18
Patterns Related to Yesterday: Breakouts, Breakout Pullbacks, and Failed Breakouts
Many trades in the first hour are related to patterns from the prior day, so try to anticipate setups before the market opens. Look at the final hour or two of yesterday to see if there was a strong trend (an always-in direction that might carry over to today), a trading range, a channel, or any kind of pattern that could lead to a breakout on today's open. Although some days open within a quiet trading range from the final hour or two of the prior day and the moving average is flat, on most days there is some kind of breakout on the open. When you are uncertain what the breakout is, simply look at the moving average and use that as a proxy. If the first bar is entirely above the moving average, think of the open as a gap up. If the first bar is entirely below the moving average, assume that the market is gapping down. There is usually a gap between the close of the final bar of yesterday and the open of the first bar of today, and that alone is a breakout. Look for breakouts of anything, including a channel or flag into yesterday's close. It can be a one-bar final flag or a three-hour channel. Look for a breakout below any swing high or low, especially the high or low of yesterday.
Once today opens and you see a breakout, you have to evaluate how likely it is to have follow-through. If there is a large gap down and the first bar is a strong bear trend bar with an open near its high and ...
