There have been a number of markets that have formed channels this week. Channels can be either a good or a bad pattern to identify and trade. They can be good if you know whether to expect the market to stay within or break out of the channel or tougher to trade if you don’t know which of these two moves the market will make.
Technical traders are often told to ignore the fundamentals. For the most part I believe this and preach it to new traders; I can’t tell you how many times I’ve had a client (or me, once in a while) argue with a market that “This market shouldn’t be going lower; the fundamentals are bullish!” Not only is fundamental analysis too subjective (at least as I’ve used it), someone will always have better fundamental information and will know it long before you do.
Market reports-economic data releases, crop production or energy inventory reports, central bank meetings-are one facet of market fundamentals that I do pay attention to. That’s why I put them at the bottom of every night’s Swing Trader’s Insight advisory.
There are two related reasons that I try to know something about the upcoming calendar and once in a while I will try to discern what “conventional wisdom” is before an upcoming event. The first one is for risk management. I don’t want to trade if I don’t feel I have an edge and going into most reports I think the average trader has no better than 50/50 odds of being right as to whether news will be bullish or bearish. Add on the second derivative effect of human interpretation of news (and the reflexivity of market reactions) and you’ve got something that’s difficult to predict. And when this occurs in the context of a volatile and erratic market it’s going to be especially challenging to trade.
The other side of this is that news events often result in trading opportunities after they are released as markets often make a sharp move as traders adjust to the new perceived “fair value” price. These news events are often breakout setups and then a breakout move with the added bonus that we can often know when to look for the breakout move to occur. (Sometimes when I’m feeling smart I will try to figure out what traders expect from a report and then gauge that against how the market actually reacts – “buy the rumor, sell the fact” kind of stuff.)
That brings us to today. The soybean futures markets had formed a trading range this week ahead of today’s USDA report. In the March contract the beans were bound by the $15.00 level on the upside and 14.76-14.75 on the downside. As it had been in this range all week, breaking out of the channel would likely lead to a good move.
The beauty of this is that we don’t have to figure out whether the report would be bullish or bearish. We could let smarter minds (at least smarter than me) figure that out; their opinion would come out in higher or lower prices. We just needed to let them decide which direction to move the market and we would hop on for the ride (assuming things went right.)
Below is the intraday chart for soybeans. I put March beans on the top and new crop November on the bottom as that was part of the criteria I used to trade the March.
Short after the 11 AM report release the March contract dropped below Monday’s low of 1475-4-the first downside breakout point. It made a session low to 1470-4 about a half hour later; this low held for about 1.5 hours.
During this time I was talking to a trader I work with; she pointed out that the session low for November was 13.00. That got my attention; I figured that if the November took out the 13.00 area it was likely to hit sell stops and drop further; the March contract was likely to go with it.
As the afternoon progressed I liked this setup more as the broken low at 1475-4 was proving to be resistance for any rallies, making a downside move more likely. November broke 1300 and March broke its 1270-4 low about 12:50 PM and within about 20 minutes it had dropped to a session low of 1253-4, a move of $850.
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.
THE RISK OF LOSS IN TRADING COMMODITY FUTURES AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL. THERE IS A HIGH DEGREE OF LEVERAGE IN FUTURES TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS. THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS FOR YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS LARGE GAINS.