Wheat futures had a breakout setup for Wednesday. As it turned out, this coincided with a decision by China to raise the import tariff on some US grain products. This resulted in a good breakout trade in wheat; I wonder this is also an example of the types of market moves we can expect with a Trump administration.
On Tuesday, March Chicago wheat showed a number of the patterns I use to identify breakout setups- it was an inside day with the narrowest trading range of the previous seven sessions (NR7) as well as a doji bar. These indicated a lack of direction bias and trading interest on Tuesday, and set the market up for a potential breakout move on Wednesday.
In Tuesday night’s edition of Swing Trader’s Insight, wheat was listed as a breakout trade candidate. This meant for Wednesday we would anticipate a directional move and look to enter a trade in the direction of the breakout when the market moved beyond close in support or resistance. The first breakout reference prices would be the Tuesday high (427-2) on the upside and low (423-4) on the downside.
Wheat showed some weakness overnight, trading and closing below Tuesday’s low. For the day session we could look to short the market on a failed rally above the Tuesday high, if we saw that. However, with today being a breakout day we would also want a trade entry if the market moved in the anticipated direction- that’s the basic principle of breakout trades.
In the STI Morning watch list I suggested we watch the Monday low of 421-0 as an additional reference price for a downside breakout. In addition to being a swing low (higher lows on either side of it), it also lined up with the 13 December high of 420-6. Given the breakout setup, a move below this area would likely yield a bigger selloff.
The 8:30 AM open was 423-2 and within about three minutes it pushed below our 421-0 reference price, triggering our short sale. The initial stop loss could go above the day session high (423-2) to the session high of 426-2. Wheat quickly moved lower, making a session low of 412-0 around 9:30.
There was speculation that the new Chinese tariffs were a warning shot to a potential trade war with the US as it responds to President Elect Trump’s statements about trade and protectionism toward China and other foreign trade partners. The timing of Tuesday’s breakout setup may or may not have a coincidence to China’s action however continued actions and statements from the Trump administration may cause more markets moves like we saw this morning- great conditions for the kind of trading I do for Swing Trader’s Insight.
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