The Headfake & the 'News Addicted' Market - Trade Entry

There's been a lot of focus in the press/blogs recently about increased volatility in the markets. Trump Tweets, China Trade, Interest Rate speculation, Brexit and just a few days ago - Saudi Oil disruption. What's not been mentioned much is what happens when the news subsides. Has this volatility killed off another side of the market? Going back a few years, we'd get very healthy speculative moves on the S&P Futures with 3-4 intraday moves of 10-15 point. We'd often end the day exactly where we started. The market giving the impression that a lot of trading went on but everyone that got in, also got out and we ended up back at the starting point. Right now, on days where we don't have Geo-Political news, there's a real lack of volatility.

It's as if we have become so addicted, that on days BIG news is absent, there's no enthusiasm from speculators to play the old "swing up and down" game. As none of the running Geo-Political dramas are close to resolution, we have to consider having two extremes of volatility to deal with for a while.

For the new retail trader, looking for a candlestick pattern to repeat each day, this must be very confusing. For those with more situational awareness, it's still going to be frustrating. It's hard to switch from high opportunity days to low opportunity days. There can be a tendency to take a few 'pot shots' when there's no opportunity there.

With this in mind, we need to look at headfakes again. The headfake is a false breakout. It's similar to fading the end of a range but the Risk:Reward ratio is more favorable. That means you get to be wrong about headfakes more often, yet still have positive expectation. Headfakes also come after the range has been tested a number of times, at which point, fading the range becomes trickier. The headfake is identified by a sequence of events:

  • The range breaks, usually with a fast move.
  • The volume on the break is high.
  • The move paused 5-6 ticks above the range (that's a rough guide for S&P Futures, it'll be more on less liquid markets), often with an absorption event.
  • Market starts to move down & eventually those that bought the break get stopped out and we move down.
  • Range-bound behavior resumes, often with a move to the opposite end of the range.

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Headfake in the S&P500, 11:30am EST, 17th Sept, 2019.

This is a recurring theme. The yellow box above is around the range and we can see the first decent break ends in a circle - showing absorption. This is where buyers got trapped. In this scenario, there's a good chance the range will resume and we'll hit the other side.

We did have a couple of half decent moves off the open, around areas of high volume overnight but the day was very choppy after that. There was almost 2 hours of choppy, directionless action before a premium opportunity occurred. That's a lot of time for an impatient trader to take pot-shots at the market through boredom. Which is of course, one of the challenges when we are used to so much news driven volatility that presents more frequent opportunities.

Starting the day with high expectations because of prior days/weeks volatility is something you need to be wary of.  Even if the market is addicted to news right now, we have to trade the conditions we are presented with. That might mean sitting on your hands, rather than hope the market is going to suddenly "lift off" and give us today what it gave us yesterday. After all, Trump can't be on twitter every morning!

The headfake is the patient traders' friend. Keep an eye out for them on the choppy days and it'll at least give you a reason for waiting out the rough action.














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