The Breakdown

The Market Tale (Sep 25, 2019)

“Boom,” uttered Bear.

He shorted yesterday at 9814 just a couple of hours before breakdown (March 2020 futures contract). Even Bull has placed a sell order at 9988, but he didn’t get a fill.

“Sometimes, the market doesn’t give you a pullback,” said Bull about his unfilled sell order.

“That’s the hallmark of a strong trend,” replied Bear. He was downplaying his euphoria, so as not to offend his friend.

“I guess the longs were already closing their positions at market, just like I did recently.”

“And then shorts piled in. Look at Open Interest: it was rising just before the breakdown.”

Bear compares price action (first chart) with open interest (second chart)

“However, it declined during the breakdown itself. That means shorts were closing their profitable positions using long liquidations.”

“Yes, that’s how it always happens. People want to realize the profit. And even though shorts are generally using lower leverage than longs, they still use it — and they reduce leverage after breakdown by closing a part of their position.”

“Which is quite strange — they should be doubling down on their profitable position.”

“Theoretically, yes. But people are fearful creatures — they’re always quick to realize the profits.”

“What about you: have you closed your position?”

“No, and I’m not planning to. The macro price action is clearly bearish, so I’m expecting more downside in future. Right now, however, we’ll enter the chop: on one hand, the major range broke down, but on the other hand, the price has reached support.”