As is often the case, the release of the weekly EIA report on US petroleum inventories provided a great opportunity to trade a breakout setup in crude oil futures. I’ve written a number of times about this recurring opportunity; this week’s release was another example of this trade.
I almost always look for a breakout trade opportunity after the EIA report, unless there are extenuating circumstances. Regardless of whether there are identifying breakout patterns, the report often results in a sudden adjustment to opinion the supply and demand picture for the energies, with a resulting move in prices.
In last night’s edition of Swing Trader’s Insight, I noted that crude oil was on the Sell Short day of the Taylor Trading cycle; this was corroborated by ROC, which was on a sell signal for today. There also was a minor breakout pattern as Tuesday was an inside day. I would have been looking for a breakout trade today even without yesterday’s inside day, not just because of the trade opportunity but also because I want to be agnostic about direction for a breakout trade, as it’s difficult to predict which way a breakout trade will move.
In this morning’s watch list for STI I reminded us about the breakout setup and suggested we use 48.28 (just above the overnight high) as an upside reference price and 47.50 (just below the 47.58 Fibonacci retracement level) as the first downside price. If you wanted to use less aggressive levels on the downside you could watch the Tuesday low of 46.94 or the Friday low of 46.74.
July crude oil spent the morning trading in the upper $47 area, making a session low of $47.56 and giving added significance to the $47.50 area as the first downside breakout level. The EIA proved to be a bearish surprise, as crude inventories showed a build in inventories when a decline was forecast. Additionally, gasoline inventories rose last week in a time of year we often see declines.
The report caused a sudden selloff, with crude dropping under all three breakout levels in the minutes after its release. This was a good example of why it’s often a good idea to trade breakout setups with resting stop orders for trade entries, as the speed of market moves can make it difficult to manually enter trades at the prices you’re looking for. (Additionally, using resting orders removes the psychological impediment of entering orders in volatile markets.)
The selloff was swift, making a session low of 45.92 in fifteen minutes after the report release. If you wanted to be done for the day, taking profits here would be logical. This was a large move in a short amount of time- the type of move we hope to see for a breakout trade, but also the type of move that can be followed by consolidation. Consolidation has characterized the market for the remainder of the morning, although it’s still not showing much propensity to rally.
Essential Guide for Futures Swing Trading
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