This morning I sent a tweet that said: “$CT_F (cotton) about to take off?”. In a little over an hour it had rallied about 150 points or $750 from where it was when I made the comment; in another half hour it was up by another $200. What did I see in cotton?
This was a great example of the kind of breakout setup I look for. In addition to having a good pattern, this breakout occurred at a significant resistance point; the combination made for an explosive move.
Below is the daily chart for December Cotton futures and today’s Trade or Fade report for it (for info on ToF go here). In June, CTZ pushed up to a high of 79.90 before a month long selloff. The past three weeks have seen a big rally; it then spent the first three days of this week consolidating under that June high.
Good breakout setup and trade
Trade or Fade-breakout indicated
Yesterday gave a breakout setup. Wednesday was the narrowest trading range of the previous four sessions; it also was a doji day. These are two of the patterns I use to identify breakout setups for my Trade or Fade service.
When a market has a breakout setup, we look for a directional move in the following session. See the intraday chart below. In the cotton there were two potential breakout points to look for-either yesterday’s high at 79.95 or the Trade or Fade breakout point at 80.12. Our strategy was to buy when it rallied over these points. A stop under the 20 period EMA would keep the risk limited.
Good breakout rally
As this rally was into uncharted territory, finding a profit target was interesting. My first target was the second Trade or Fade resistance at 80.88. After a small correction it rallied up and made a new high. By this time you should have been out of a short term breakout buy. This was a windfall move; and windfall moves are likely to get taken away if you hold on to them for too long.
The combination of breakout setups and chart support / resistance points can make for a powerful combination setup; learning to recognize and trade these patterns can help you exploit volatility expansions and the big moves that often occur with them.
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit 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.
