As I’ve written previously, the weekly EIA energy inventory reports often give an opportunity to catch a market set up for a breakout move (most recent article is HERE). Today was another good example of the trade opportunities this report can provide.
In the June 22 post I noted that I expected the $50 level to serve as a pivot point for crude oil; that the market’s inability to regain $50 could lead to a bigger selloff. After a big down move on Tuesday, crude staged a partial recovery yesterday. Today’s inventory report had the potential to resume a push back toward $50 or to strengthen the down trend.
The beauty of trading breakouts is that we don’t have to try to guess as to the direction the market may take. Instead, we let the market decide on a direction and get in on the trend as it gets started (when things go right). To do this we look to either go long if the market moves above a resistance level or go short if it drops below support, anticipating that this will serve as a springboard to a larger move in that direction.
In this morning’s Swing Trader’s Insight Futures Watch List I suggested we look for such a breakout trade for crude oil futures after the 10 AM CT release of the EIA report. At the time of writing I suggested we look at either the overnight high of 48.14 or the last overnight low of 47.82 (basis August futures) as our reference prices for a breakout move.
I write the morning watch list relatively early in the morning. As we approached the 10 AM report release, crude dropped below the 47.82 low. Rather than take a short before the report (which would essentially be the same as guessing the post-report direction) we could switch the downside breakout level to the overnight low of 47.34. This gave us entry triggers of either a rally above the 48.14 session high or a break below the session low of 47.34.
The EIA ended up showing a decline in crude oil inventories roughly equal to analysts’ estimates. Apparently, however, a number of traders had been looking for a more bullish number (especially after yesterday’s API report) and crude oil sold off in the wake of the report.
We entered our short position in the wake of the report (I use resting stop orders to enter breakout trades so I don’t have to think about it or try to enter orders in a volatile market). The initial stop loss could be placed just above the recent high. Breakout trades rely on strong momentum, and a reversal of momentum would be a reason to liquidate the trade.
As it turned out, the placement of the initial stop loss wasn’t important as crude oil sold off sharply. By about 11 AM it had fallen to yesterday’s low and the post- Brexit vote low. Around Noon, a decisive break of these lows prompted a drop to a new session low of 44.87.
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