Following a selloff out of a breakout setup last Friday, the April live cattle futures had another breakout setup for Tuesday. Today, the breakout setup led to a rally.
On Monday, cattle showed a number of patterns that indicated we should look for a breakout move on Tuesday – it was an inside day, a doji bar, and an NR7 (narrowest trading range of the previous seven sessions). These patterns suggested we should anticipate for a breakout move for Tuesday; a trending session in which the market would open at one end of the daily range, trend in one direction over the session, and end up closing at the other end of the range. This was my comment in last night’s edition of Swing Trader’s Insight, so we knew what to look for today.
For a breakout setup, we look for the market to move beyond close in support or resistance, and that move to serve as a springboard to a larger move in that direction as the market momentum increases in a positive feedback loop as it moves farther from the open.
The previous day high and low are the first reference price levels to watch for a breakout setup. The previous high and low were the levels that stopped the market in the previous session so moving beyond them would be a spot to expect a bigger move to start. For the April cattle, today’s levels were 115.35 on the downside and 116.05 up.
At the 8:30 AM open, the first move was down, trading below the Monday low. I don’t take trades on the open so I didn’t trade this signal. The market stayed range bound (within the Monday range) until it rallied above the 116.05 Monday high at 9:45 AM. We took this signal, going long when it moved above the Monday high. The initial stop loss could got below the 115.55 low.
The rest of the session was a trend day; the type of session we look for on a breakout trade day. A little after Noon it took out 117.30, the 23 Feb. high, and it continued higher, making the 118.22 session high just before the close.
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