In this morning’s comments for Swing Trader’s Insight, one of my comments was to sell the July Wheat futures if they fell back below the Tuesday high. A sharp morning selloff gave a good trade opportunity.
Following a bullish USDA report yesterday afternoon, the grain markets traded sharply higher last night. For the July Wheat futures, they gapped open above the Tuesday high and they held the gap open through the night session.
An opening gap often results in one of two things. First, the market may continue higher – a gap and go move. Second, the market may decline off the open to fill in the gasp. If the market does sell off, the newly established longs will increasingly look to sell out as the market moves lower. This is the scenario I was looking to take advantage of.
The grain markets are a good candidate for this type of trading. The distinct morning opening often makes for more emotional traders, which can work to our advantage. Also, the separate open allows us time to be prepared to trade the open, which helps with both performance and confidence, as you have time to plan out your trade.
For the July wheat, my specific comments was to look to short it when it dropped back below the Tuesday high of 509-2. This would fill in the gap and would also be the level where anyone who bought overnight would now be losing money on their trade. The lower prices would go, the more likely they would be to sell out, adding to the downward pressure.
We got the trigger for the sale shortly after the 8:30 AM open (this is a setup where I like to enter with a stop order; it lets you be prepared early.) Our initial stop loss could go above the day session high of 513-4, giving the trade a relatively small risk.
Selling pressure intensified quickly, making a low of 495-4 about 20 minutes into the session. After a bounce, it sold off again, making a low of 490-4, which filled in another open gap.
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