Tutorial - Qualified vs non-qualified breaks

To determine whether a break is qualified or not, there are four things to look at:

  1. TDST – Most important tool which usually works good both ways- break or fades.
  2. Trendlines – Works on many instances.
  3. Prop levels – Here we consider closes above or below to be the most important. This tool is not as important as the TDST but is reinforced if qualified.
  4. Fibonacci retrace levels – Mostly used on bigger timeframes regarding breaks.

The thinking behind this is that if the markets expects a break of a level, it will most likely close in the direction of it as people position for it.

For a break higher of a TDST level the market approaches it with an upclose i.e

As most are positioned for the break, it is less likely to work and more likely to fail and/or close back below it (or above).

This due to profit taking and stop losses more or less.

The break is then non-qualified.

If the close before (on any timeframe) is in the opposite direction (downclose for an upside break and vice versa). The market is less likely to have bet on it and the break is then qualified as the market must turn.

In all instances the break can be cancelled the following bar if the following occurs:

  • Opens lower
  • Closes below the level
  • Top ticks on the open- Trap

For trading, these are signals to get out/short as the move is likely to reverse. The market simply not has the power to get through. This means that if a break is seen, the market must then open in the direction of the break and the open can not be top/bottom tick.

If a break up opens, the next bar up and then tick higher than the open the break is qualified, else non-qualified. This follow through is essential and often overlooked.

There is a qualified break if:

  • Market gaps on open to break the level and does not close the gap. The energy in the market has shifted and likely will trap people.
  • If the bar before the break is far below the break (upside). This means the market is unprepared for the break. The move should then continue.

However, the opposite direction close is the most important. If combined with the other two (gap/distance), it reinforces the break.

Summary:

  1. For a break to be qualified it must see a close in the opposite direction of the break. For an upclose, the market must close down the bar before.
  2. It is then followed by the break.
  3. The following bar after the break must open in the direction of the break and then overtake opentick.

The break is then qualified and the move likely to continue

Examples:

SPX 1987 is the mother of tops but also the perfect example of TDST holding and then breaking.

Two bounces from TDST came from downcloses so that was a buyentry. It went from the second to record a daily sellsetup bar 9. As new TDST support is created at bar 1 low it is a “coincidence” that they were at the same level. However, it was also trendline across the lows. It then tested TDST from a downclose and bounced to close up.

The day after it broke and opened lower the following bar qualifying the break.

The rest is history but it was the perfect qualified break!

SPY 2015 tested the TDST numerous times and even close above from a downclose. However, the open the following bar was down.

 

It repeated this for months until it broke downside TSDT, bounced, failed again and collapsed.

The runup to the 1987 top came from a breakout above a trendline. The previous close was down and it then never looked back

SPX 2016 saw a big bar in June qualifing Prop up for Prop target (blue line).

 

In September, it tested downside Prop level from downcloses but did not see a good close below.

 

A bounce then followed as should be expected.

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