Finding Breakouts And Avoiding Fakeouts In A Market At War With Itself

After a few weeks of travel culminating in last week’s Inner Circle Conference in Orlando, I’ve returned to a market filled with extremes. There is a lot of optimism and a healthy dose of anxiety riling the market’s animal spirits, which has made for interesting and deceptive trading patterns. What I mean by that is, more frequently I’ve come across stocks gapping up on the open looking for a breakout only to reverse course on the next candle and fall back to a range. That can be both a powerful trend for thoughtful traders and a alluring trap for those using feeling over effective planning and preparation.

I’ve always been vocal about my preference for approaching the open with a watchlist and a series of entry and exit points on a given ticker, and those expecting any contrary advice night be disappointed. However, as the market environment continues to evolve, particularly going into the market’s traditionally more placid months, I’d like to advise traders to exercise patience and diligence in approaching a position.

I’ve actually got a couple of case examples of how a dose of patience has helped me to counteract some of the exuberance driving prices.

Monday, April 2, I had Sellas Life Sciences Group Inc SLS on my watchlist after it had a stock split. It gapped up from $3.40 on the open to around $6.30 and was trading at volume. However, I was waiting for a bigger break out on the scalp. Knowing the markets, I waited while trading consolidated, watched as it tested new levels and then took off. I had an entry planned for this breakout at the $8.80 handle and added to it once SLS took it’s old resistance level at $9.20. I was able to close out near the high.

This was one of my favorite trades of recent memory because I was able to read the chart, anticipate the break, and stick to my preferred levels. Of course, there is always the promise of more if I had got in after the gap, but I also risked a nearly 40 percent downside if momentum reversed.

I came across a similar set up with Tenax Therapeutics Inc TENX later in the week. I was a little more aggressive on this, adding to my position close to the $10 range on instinct and looking at breaking the $12 level. In this case, it didn’t reach above $11.90 and I was stopped out at $11.50. The result was just shy of $3,000 slippage, but it was still one of my better trades of the week.

In the case of Sellas and Tenax, I had both of them on my watchlist as they each wrapped up a reverse split. Because the setup, I knew that both had potential to squeeze up on a news item or speculation following the consolidation. This goes back to looking for charts and patterns that you are familiar with and that you know you can trade. However, the larger point is that, despite heading into the slower market months, the momentum exists in the market to trade at scale.

Disclosure: Warrior Trading is an editorial partner of Benzinga.