This week Lean hog futures had come down to test their contract low. This, combined with a breakout setup today, led to a good trade opportunity.
When futures markets trade near significant highs or lows they often create trade setups however the opportunity is often not what seems easiest or most logical at first glance.
For the past couple of days I’ve been watching the December lean hog futures. The longer term trend is down and the market had come down to consolidate above the contract low at 57.05. In stocks this would seem like a time to buy when the market is cheap, as this is where the market previously found support.
The opposite is more likely the case with futures markets. If a market is trending and approaching support or resistance, the breach of the support or resistance level is often more likely to lead to an acceleration of the move in the direction of the trend.
That’s what I was anticipating in hogs. The longer term trend was down; I anticipated that a break below the 57.05 contract low would cause an acceleration of the selloff. Because of this, we would look to go short if it broke below the 57.05 low. (We wouldn’t short until the low was taken out; we only want to take a trade when a market is confirming it’s doing what we anticipated.) Wednesday’s NR7 and doji were patterns that told us a breakout move was likely today.
Hogs opened at 57.70 today; early in the session they attempted to rally above Wednesday’s high (the first resistance). A selloff ensued, and the 57.05 low was taken out around 11:25 AM, triggering our short sale. A sharp selloff ensued, making a new contract low of 54.87 around 1 PM.
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