As I noted in Swing Trader’s Insight last night, crude oil futures had a breakout setup for Wednesday, as Tuesday was NR4 day and a doji. This fit well with today’s release of the EIA petroleum inventory report, which is often a catalyst for a breakout move.
Tuesday was an interesting day as it followed an inside day on Monday, which could have been another breakout signal. However, a setup tells us what to anticipate; a market has to actually make the move we anticipate before we actually pull the trigger on a trade. As Tuesday showed further range contraction and a lack of directional movement, on Wednesday we would continue to look for a breakout move out of the setup.
For a breakout setup, the first two breakout trade trigger levels are the previous session high and low. For January crude oil these levels were the Tuesday high of 57.92 and low of 57.08 – we would look to buy if it moved above the Tuesday high or short if it moved below the Tuesday low.
The first downside breakout occurred early this morning, around 5:40 AM CT, as it dropped below the Tuesday low. By 9:30 AM it had dropped to a session low of 56.55. This was great if you had been up early enough to catch the sale (I wasn’t) but fortunately for those that missed the first sale, we had another opportunity for a breakout trade after the 9:30 AM EIA inventory report.
The weekly inventory report often causes a breakout move because it gives a good picture of US stocks of crude oil and products as well as how hard US refineries are running. It also seems to be a difficult report to predict and game as it often causes a large market move after its release. Given the overnight selloff, the EIA report could lead to a recovery rally or a resumption of the selloff, depending on what the report showed.
I used the Tuesday low of 57.08 and the session low of 56.55 as breakout trade levels after the EIA report – breaking these levels would signal a rally or a new selloff, respectively. Although the overnight move was down, we should keep an open mind as to direction- we’re not trying to predict what the report will say or what direction the market will go. Rather, we let the market decide where it wants to go,
The EIA report proved to be a mixed bag and the market reflected that. It rallied immediately after the release, reaching a high of 57.05. This fell just short of the Tuesday low of 57.08 so we just avoided getting long. Then it began to work back down as the bearish trend reasserted itself and we got stopped into the second short a little after 10 am. It continued lower for the balance of the session, making the 55.87 low around 2:30 PM.
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