Crude oil has been selling off after Wednesday’s weekly inventory report on Wednesday.  After the inventory numbers, crude initially rose, testing resistance at $75.  However, the rally quickly faded, and accelerated as Tuesday’s low was taken out.  By the end of the day it was $2 lower.  Note that MACD showed bearish divergence on this week’s rally-prices made a new high, but MACD made a lower high.

Yesterday saw a range contraction, and a doji, indicating there could be another directional move today.  Yesterday’s close was near 71.21, which was a 50% retracement of the past two weeks’ rally. 50% retracements often serve as support or resistance, and a violation often turns a correction into a trend change.  Yesterday’s low of 70.67 hit support at the late July high of 70.60.

Bearish Diverngce, breakout down

Bearish Diverngce, breakout down

On last night’s Swing Trader’s Insight newsletter I identified today as a breakout day for crude oil.  This meant I was looking for a directional move today. I look for close in support or resistance, and treat a break of those near in points as a springboard to a bigger move.  The first points to watch are the previous day’s high and low. Yesterday’s low for October Crude was 70.67; the red line on the chart below shows that price and gives you an idea of the potential trade when it was taken out.

The red lien is yesterday's low

The red lien is yesterday’s low

Finding objectives for breakout trades can be more of an art than a science. I use the support and resistance numbers generated by my Trade or Fade advisory, but it’s not always the be all and end all.  For example, the ToF objective for a short sale is 68.91; that’s a long way from the breakout point. (Contact me for info on ToF.)

So when ToF doesn’t help, or if you’re not a subscriber, I look for prices that should be support or resistance points.  For this crude oil trade, I’m watching trendline support at 69.66-that line is drawn off the lows of 7/13 and 8/17. Any points on the chart that might stop a rally or break are points to watch for objectives.

Breakout trading is relatively simple; you use easy to spot patterns to identify trades with the potential for breakout moves.  This pattern recognition allows you to be prepared to take action before the move occurs.  You then use the chart to identify prices at which the breakout may occur, and potential objectives.

I work with my clients and subscribers to help them identify and trade these setups; feel free to contact me with questions or comments. For a more in depth discussion, visit the Trade or fade information page here.

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