Yesterday afternoon I sent out an email that pointed out a potential trade in the June lean hog futures. This came from Monday’s breakout setup; hogs sold off this morning and look to close limit down today, which suggests more downside on Wednesday.
In my Swing Trader’s Insight advisory I use a number of patterns to identify markets that are set up for breakout trades for the following session. On Monday, June hogs showed three of these – Monday was an inside day, an NR7 (narrowest range of the previous seven sessions) and it was a doji bar. These three patterns meant the market had good odds of a breakout move today.
For a breakout trade, the standard trigger levels are the previous session high and low; we look to go long if the market moves above the previous day high or we go short on a move below the previous day low. I like breakout setups because we don’t have to pick a direction, we let the market decide where it wants to go and we go along for the ride (when things go right).
This morning, June hogs opened at 96.75, just below the Monday low of 96.85. There was a quick selloff down to 96.22 before it bounced back up to the area around the open. There were two potential short entries here; you could either sell around the open / Monday low or when it broke below the first session low of 96.22
June hogs reached limit down around 9:45 AM and were never able to muster much of a recovery rally and by 11:15 they were locked limit down for the remainder of the session. Shorts could have chosen to take profits today or hold in anticipation of at least a lower open tomorrow as the market absorbs additional selling pressure.
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