Today had a breakout setup for the crude oil futures. That’s not surprising; Wednesdays are the day that the DOE releases the weekly crude oil inventory report. Crude oil tends to have a directional move after the release of the report. This is generally the price action of a breakout setup day; so anticipating this action and trading accordingly can help you be in sync with market activity. (For a more complete explanation of breakout trading, my Breakout Futures Trading Method book is here.)
Below is the daily chart for the January Crude Oil. I circled yesterday’s bar; it was an NR4 day (narrowest range of the previous four sessions); it was also a doji bar. These are two patterns that indicate a breakout setup. Also notice the trend line across the recent swing highs; it came in at 80.77 today.
Yesterday’s breakout bar is circled
On a breakout day, we look for the market to break close in support or resistance, and then extend the move during the session (a directional move in the4 direction of the breakout). The break of the support or resistance is the entry trigger for a breakout trade.
A five minute chart for January crude oil futures for today is shown below. I drew a line at yesterdays high of 80.33; it’s one of the entry points for a breakout point trade. I also drew a line at the 80.77 trendline resistance.
A bad morning for the bulls
Today crude had move over and back of yesterdays high numerous times early in the session. On inventory report days I generally don’t do any trading before the inventory report; the play comes after the report comes out. I drew an arrow to the bar that coincided with the release of the report.
There had been a lot of positive price action early in the session; I wanted to see how the market reacted after the inventory report. The strong overnight and morning price action had attracted buying, as evidenced by the strong price action.
Right at report time, then again 10 minutes later crude oil tried to push through the trend line. The previous high for the session was 80.83; this occurred at 5:40 this morning. The two pushes after the report went to 80.85 then 80.88, but were unable to go any farther.
The inability to take out the previous high meant that the bulls’ power was waning. The fact that the rally couldn’t extend meant the buying auction had ended, and a downside auction was likely (Auctions are a market profile term for market moves). Additionally, the market’s early morning strength meant a selloff could get ugly as the trapped bulls sold to head for the exit. I noted this on my Twitter account (TraderScott on Twitter).
So where could you have looked to short? A nimble trader could have sold on retracements back through the intraday highs as it retraced back through them. Additional points of note were yesterday’s high (a Taylor “high violation” sell), the low of the report bar at 80.09, or the previous day’s low at 79.84.
For more information on trading breakouts in futures, check out my Breakout Futures Trading Method book here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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