As I wrote last week, crude oil futures formed a double top and had a great breakout sale last Tuesday (the setup bar is circled, read the post here.). There was followthrough selling through early Thursday, then a reversal and rally.
Friday’s bar is circled on the chart below. It was the narrowest session of the previous four and a doji, so I labeled today as a breakout setup for today’s session.
On a breakout day, we’re looking for the market to make a directional move as the previous day’s indecision is resolved. We look for the market to break close in support or resistance, and then have that move extend in the direction of the initial breakout. There are a number of ways to find breakout points; the original points I watch are the previous day’s high and low. (I developed the Trade or Fade advisory to identify and trade breakouts, see more information about it here: ).
Friday’s low for Oct. crude was 71.78; this price was breached last night as the Chinese stock market sold off. This got the selloff rolling; there were other points along the way to look to sell. (The Trade or Fade sell point was 71.41).
I generally don’t view these breakout trades as position trades. If they go well, markets make enough of a move to take a profit on the day of entry. In addition, breakout moves don’t have any longer term predictive ability, and I have found that markets often reverse direction the following day, and take back the breakout day move.
For this reason I look for objectives for breakout trades as soon as they’re entered. For this trade, the first price objective was Thursday’s low at 69.83 (the first trade objective from my Trade or Fade advisory was 70.07). Looking farther down, 69.43 is the first Fibonacci retracement level of the rally off the July low.
Two breakout sale days
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