Why does it seem that failed breakouts generally fade?

December 13th, 2018, 03:39 AM

There are two types of trade, the market is busy and there is resistace at the high in the form of limit orders that stops the market moving higher, the other one which I'm talking about is where there is no resistance and it breaks the daily high by a couple tick, print like 300 contracts into the highest traded price and doesn't break out from that point, it just fades, what I want to know is if on those days there is no resistance stopping it at the high why does the market always fade back into it's range, why doesn't it slowly drift up into the highs as no resistance is stopping it.

My vague theory: Self fulfilling prophecy by technical analyst, they think there is resistance at a technical point and all jump in and sell the market down a few ticks, funny thing is there ain't no resistance at all, but who knows if this theory has any merit.

Anyone know of any other profitable events that occur when markets reach the daily high/low? Here are my three, this may generally be all but not sure..

-Momentum breakout (typical)

-Resistance reversal fade (think deep liquidity as a wall)

-and as stated, the failed breakout fade (typically on slow days/markets)

December 13th, 2018, 09:38 PM

Hi Revan,

Interesting question. I can't offer you much from a TA perspective, but I can maybe offer a different perspective.

I think that daily highs and lows potentially create the best arb opportunities for multi-instrument, multi-symbol, or multi-exchange types of algos. When the market hits extreme points there is usually more disagreement between say ES and SPY for example. A few zealous retail traders can pile on and move things out of whack more at extreme points. So this creates opportunities for the big guys. So this is likely one reason you may see things revert and move unexpectedly on extreme levels.

The other point about limit orders you made is interesting, but at a microstructure level there is a little more at play than meets the eye. The side that keeps winning (Bid or Ask) starts every price level with 0 resting volume in the limit order queue, whereas the side that lost gets to start each price level with resting volume from the DOM. So the side that wins is always at an extreme disadvantage. It will only a few market orders to quickly hit to break the level of the side that just won.... vs. the side that just lost which has 200, 300, 600, 800 contracts depending. More times than not, after a few levels where one side wins, for 2,3,4 price levels in a row, you will eventually hit a pocket of resting stops and these will wipe out the limit orders from the winning side almost immediately. So this is why book sweeps don't go on for ever on one side. All it takes is a pocket of stops and 1 or 2 price levels that flip the opposite way and the party is over.

Just a few theories....

Ian

Why does it seem that failed breakouts generally fade?

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Why does it seem that failed breakouts generally fade?