Holiday markets tend to be feast or famine for trading. Some tend to either do very little, providing no real trade opportunities. Other times they make big moves as less liquid conditions and the shortage of trading prospects can create explosive setups that attract short term traders when opportunities do appear.
Today we saw both types of situations. Some markets didn’t look tradable today. Last night the Euro appeared poised for a selloff however the expected move came overnight, which didn’t leave much for today. Stock index futures were on the Sell Short day of the Taylor Trading cycle; they may still squeeze lower before the close.
One market I did like this morning was natural gas futures. On Tuesday it consolidated around the previous December /winter high of 3.758 basis the February futures. On Tuesday it closed with an NR7 (narrowest range of the previous seven days) pattern as well as a doji bar. This structure told us to anticipate a breakout move for Wednesday- we would look for a strong directional move, either higher as it pushed into new highs or lower, if it failed to clear the highs.
When I was writing this morning’s watch list for Swing Trader’s Insight I said “Breakout setup (NR7, doji): watch 3.758 as the upside reference price.” I favored the long side because the longer term trend is up and it made a similar breakout rally last Friday. Additionally, last night it attempted and failed to break out to the downside (using the Tuesday low of 3.694 as that reference price.
On the upside I suggested we look at the December 9 high of 3.758 in addition to the standard reference price of the Tuesday high of 3.783. If the market held above the Tuesday low then we would look to go long IF it rallied above our two reference prices, anticipating that this initial move would springboard to a bigger rally that we would seek to capture.
The initial buy signal came at 10 AM, and a follow up buy came about 15 minutes later. The stop loss for this first buy could be placed below 3.724, the last low previous to our entry. If you chose to wait for the standard breakout entry (or if you used it to add to longs), that signal came around 11:15.
The remainder of the session was a classic short squeeze- the market accelerated higher in a positive feedback loop as it rallied into the close. This was a good example of being patient with a favorable trade, the later it gets into the session, the more pressure is put on “wrong way” traders to take their losses, which gives the market momentum in the direction of the breakout.
Essential Guide for Futures Swing Trading
In this guide, experienced trader and broker Scott Hoffman explains the trading methods he uses to analyze and trade the futures markets and to publish his trade advisory, Swing Trader’s Insight.
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