While some might argue there's always a bull market somewhere, it doesn't mean you have to invest heavily at all times. Certainly with swing trading, as with most styles, it's best to hit it hard when you are in a favorable environment and less aggressively when you aren't.
The Rise Of Wheat
Despite crushing losses in the major indexes, cyclical and commodity stocks have put in stunning performances. Oil and gas in particular have dominated IBD lists from industry group strength to relative strength winners.
When looking for innovation that will change the world or a critical energy source, wheat is probably far from top of mind. But with the war in Ukraine, wheat can't be taken for granted anymore. According to the World Population Review, Russia and Ukraine grow 30% of the global wheat supply. The threat, and eventual breakout of war, caused serious disruptions in that market.
Teucrium Wheat Fund provides an easy way to take advantage of changes in wheat prices using a traditional brokerage account. The exchange traded fund tracks the price of the Chicago Board Of Trade futures contracts on wheat.
After fairly flat action, the price of wheat made a strong move Feb. 22, just two days before Russia invaded Ukraine (1). Wheat shot up over 50% in the next two weeks (2). The heightened volatility and uncertainty of war didn't make for a good swing trading opportunity at that point. But if the chart were to tighten, it might look interesting.
Swing Trading Setup
Within a week's time, wheat lost nearly 25% of its value (3). This is why waiting for a proper swing trading setup is important. Buying into the volatility can lead to large losses, especially if buying extended.
On this week's podcast Andrew Chanin explains why outer space is important for Ukraine.
After a couple of months, wheat started trading in a more orderly manner. It had a roughly 20% gain followed by less than a 10% pullback (4). Proportionally similar to the first move and drop, but a lot less volatile in absolute percentage changes. The relative tightness is what we look for in the technical action for swing trading setups. The trading volume also dried up significantly.
We added the wheat ETF to SwingTrader as it came out of that short consolidation (5). Volume rose well above average and the relative strength line made a new high even with the price still below its high. The relative strength line has been our deciding factor of separating the wheat from the chaff as it were. It was an unusual buy, especially as market indexes were falling to lows on that day.
Taking Profits Into Strength
Given the weak market environment, it was even more important that we take our swing trading profits quickly. The next day, we were up over 5% from our entry and we took the majority of our position off as wheat rose (6). With just one third left, and a good profit already booked, we could afford to give wheat more room to run. And run it did. The wheat ETF hit a peak gain of 12% from our entry on the recent follow-through day (7). But sector rotation or a follow-through day failure could easily make those profits disappear.
Since swing trading uses a shorter time frame for holding, it can also be useful to use moving averages with shorter time frames. We looked to the 5-day moving average line in this case.
The follow-through day had an early warning signal of a failure the next day, but the wheat ETF held its 5-day line (8). When it gave that up the next day, we didn't hesitate to book our remaining profit (9).
Given the poor market, we considered the 4.5% average gain a swing trading win.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
