The Insights of Swing Trading
by Scott Hoffman, Senior Broker & CTA
S&P
S&Ps built on the gains they started at the end of 2005-it looks like the Santa Claus rally came a bit late this year. The notable feature for Spoos last week was Friday’s break above the old contract high at 1284.70. Thursday’s narrow range day setup, combined with a close just under the old contract high, set the stage for Friday’s breakout higher. Look for stocks to head higher this week as the market draws strength from the friendly payroll numbers last week. Resistance is at 1297, then pivot and psychological resistance at 1300. Downside support is 1290, then the breakout area at 1285.
Dow
Friday saw the Dow futures break above trendline resistance around 10970 and finally rally over 11000. The bullish MACD crossover should support higher prices; look for support at the old breakout. With the Dow making 4 year highs, it doesn’t make sense to pick arbitrary objectives. Let the market tell you when the rally is over.
Treasury Bonds
The big reversal last Wednesday may spell trouble for the bond rally, as the market was unable to maintain trade over the old high at 115. This level remains the key resistance for the bond market. 11408 is a 50% retracement of the last rally and is important support. Bonds have found a comfort zone around 114-16; look for the FOMC meeting to start a new trend.
Yen
The yen capitalized on last Tuesday’s bullish trendline break with a strong rally. The fact that the Yen found support at the 40 day moving average set the stage for last week’s rally. Friday’s further advance was set up by the narrow range days on Wednesday and Thursday, which left the Yen poised for a directional move of Friday. With the breakout above the December high, look for more upside, with objectives at 9000, then the 200 day moving average around 9150.
EuroFX
As with the Yen, the Euro found support around the 40 day moving average then staged a strong rally early last week as traders returned from the holiday. Friday’s trade reached good resistance at 122.00, and Monday’s correction and trendline break may set the stage for a bit more correction-look for 120.50 and 120.00 as objectives for the correction.
British Pound
The Pound rallied with the other majors last week, breaking above December’s down trendline. The narrow range/inside day combination we saw on Thursday left the Pound in a good position for a breakout move on Friday, and we bought that breakout after the payrolls report on Friday. The Pound saw good strength all day Friday; we took profits late in the day in anticipation of a correction on Monday. I’m currently flat, but would be looking to reenter this market from the long side.
Gold
Gold started out the year with a bang, with a breakout of a small flag pattern last Tuesday. We bought gold on Monday as it rallied into new contract highs-in a strong market; you want to find places to enter pauses in a market before its dominant trend reasserts itself. I don’t have an upside objective for this trade, but gold could see psychological resistance around $550.
Silver
Silver had a choppy week last week, as Thursday saw a sharp break under the recent up trendline, only to stage a good recovery on Friday and Monday. Monday’s trade finally tested the contract high at 928.50. The recent action in silver is a good example of why you should pick the market that is the strongest in the sector, rather than buying a weaker related market because you think it’s going to “catch up”, which I why I bought gold instead of silver. In my experience, I’ve often seen that strong markets stay strong and lagging markets continue to lag, so it’s preferable to “ride the stronger horse”.
Sugar
Last Thursday saw a break above double top/contract high resistance at 1495, only to see it close back below that breakout point. Friday’s inside/narrow range day left sugar ready for a breakout move on Monday; I sold sugar on the open Monday as it broke to the downside. My downside objective for this trade is at the 40 day moving average (currently 1424), with only a close back over the double top at 1495 negating the bearish trend.
Crude
Crude saw a strong advance last week, which was kicked off by Monday’s move above trendline resistance (see chart). Friday’s rally was a good example of a breakout of a flag formation; it’s one of my favorite patterns to look for. This was a trade you needed to be quick to take profits on.
Live Cattle
April Cattle are forming a triangle, I’ve got this market on my “watch list” for early this week, as I’d expect to see follow-through from a breakout of this formation. Momentum (the bottom panel of the chart) has pulled back to zero, reinforcing the idea that there’s a directional move coming.
Lean Hogs
Monday’s inside/narrow range day pattern set the stage for a breakout move today; a breakout should lead to a test of the double bottom around 6375 or a test of trendline resistance at 6515. This is another market on my “watch list”.
Soybeans
The expected resumption of farmer selling took a few days to get started, but the inability of soybeans to clear resistance at the 200 day moving average last week led to a good selloff on Thursday. I sold March Beans on Friday as the market broke under the December up trendline, which coincided with a bearish MACD crossover. I covered my shorts Monday morning as prices stabilized around the 40 day moving average (around 595). Longer term, I’m looking at Monday’s trade as a breakaway gap, and would look to get short again on a bounce.
Soymeal
Soymeal preceded soybeans lower last week, I got short soymeal last Thursday as meal breached December’s up trendline. I covered this trade on Friday as I was interested in selling beans and didn’t want to be overloaded in one sector. Meal did see downside follow-through on Monday, and the move under the 40 day moving average should lead to more downside action.
Wheat
As with the soybeans, wheat flirted with the 40 day moving average last week, but was unable to climb over it. Last Thursday saw a breach of strong trendline support, and this break saw good follow-through selling on Friday and Monday. Monday saw the market stabilize around the 40 day moving average at 324, but the bearish MACD crossover should lead to further price declines.
About the Author
Scott Hoffman is a Senior Broker and CTA with Daniels Trading. After graduating from the University of Chicago in 1986 with a degree in Economics, Scott worked on the floor of the Chicago Mercantile Exchange. Following his time at the CME, Scott went to work off the floor, serving as the personal broker to a former chairman of the Chicago Board of Trade. Here Scott learned the trading and brokering business, a process that he continues to expand and refine.
Scott is the publisher of Swing Trader’s Insight, a comprehensive swing trading advisory service covering all of the major futures markets. In addition to a nightly newsletter, Swing Trader’s Insight provides in-depth client education complete with specific trade recommendations and market analysis, including an S&P Morning Insight commentary, Midday Updates and Trade Management Updates. Although Scott specializes in swing trading, he has years of brokerage experience that is available to all of his clients, regardless of their individual trading styles.
PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH OPTION CONTRACTS. OPTIONS TRADING IS NOT SUITABLE FOR ALL INVESTORS. OPTIONS CAN AND DO EXPIRE WORTHLESS. IF YOU PURCHASE A COMMODITY OPTION, YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIMUM AND OF ALL TRANSACTION COSTS.
