The Wizetrade Commodities Blog

Overnight in the markets and in the news Thursday 10292009

 

Yesterday we saw significant selling pressure in stocks during the US trading session which allowed the USD Index to strengthen and energy prices to move lower with other commodities on the back of a strong USD and some concerns creeping into the markets about the rapid rise in stock values since March and sustainability as we continue to see a slow recovery in Global Economies and pending challenges to growth.

 

The Asian Markets followed through with selling pressure and the Bears ruled the session. Early European trading was bearish in the first hour, but has improved a little to essentially run flat at this early hour ahead of lunch in London.  The markets were encouraged and buoyed by much better than expected employment data from Germany.

 

US Futures are slightly higher this morning, but pulling back from highs.  The USD gave back a little of yesterday’s gains overnight, but would strengthen again if we continue to see selling in equities today.

 

Earnings from Oil and Gas continue to disappoint but we are waiting for Exxon today and Chevron tomorrow to see if the trend continues.  BP and Shell have already shared some gloom this week sighting weaker oil prices on demand and only seeing higher per barrel prices as a result of a much weaker USD.

 

On tap for news today will be Canadian inflation data; Raw Material and cost of goods leaving the factory (IPPI).  These are monthly reports that are expected to show no inflation which supports maintaining current interest rates.

 

The US will deliver Advanced GDP for the 3^rd quarter, and the forecast / expectation is that GDP saw significant gains.  Certainly a weak USD has given exporters an advantage, but the forecast has set a pretty high bar at 3.2% growth.  Be careful as the report is released an hour ahead of the open bell (08:30 ET).  Weekly unemployment claims will be out at the same time.

 

US Treasury Secretary Tim Geithner opens testimony before the House Finance Committee at 09:30 am and at 10:30 Natural Gas Storage is out with an expectation that we will continue to see growing surpluses, which could weigh in on the CAD and Energy Futures.

 

 

Below is a comparison of Central Bank gold holdings at yesterday’s (October 28, 2009) December Futures price that reveals some interesting information. For instance, I thought China would have an overwhelming amount of gold in relationship to the US. And, I am surprised to see Germany and Italy with such high amounts.

 

Of course, I am curious as to where the IMF got the money to buy so much gold. I thought they had recently asked to borrow $11 Billion in gold from the US to start its new World Reserve Currency. That would make it the second largest holder of gold in the world. And, finally, is it so hard for the US to go back to the gold standard? With the current amount of Federal Reserve Notes out (?), the value of the “Dollar” to gold may be about .007 cents. How did these banks get their gold?

 Amount of Gold Assets held by Central Banks

 

 

CME Group has announced new (reduced) margin requirements for all CBOT Grains New Margins click here. This makes leveraging better, but, PLEASE, use margin wisely as It is a two way street, works both ways, a double edged sword, tit for tat, may wreck your account overnight.

 

Energy appears to be increasing with the exception of Ethanol spreads, and Lean Hogs may be seeing a margin increase from the way Grain VS Lean Hogs VS Feeder Cattle and Live Cattle spreads.

 

Lean Hogs broke above the sideways channel for the last 12 sessions and may be heading for 5700 or so. The charts are looking good for a long swing trade candidate. The bottom of the channel is 5210 and the high was 54.95. If traders add the width of the channel to the breakout point, the high 5495, a target of 5780.  After this high, if achieved, the seasonal selloff in this market may begin with a downside target of 4000. The entire scenario may change with the value of the USDX and the Chinese economic recovery.

 

February Live Cattle may be heading higher, judging from the charts, so judge from the charts for a break out to the upside of the trend channel on the 180 Minute chart. December Live Cattle’s Short Term chart is red.

 

 

 

 

Referring to the October 21^st Blog on Gold, the selloff continues. Wizetrade Commodities charts are in alignment to the downside with angle and separation in the Mid Term chart; FAST in the Short Term chart; and a fresh cross on the 90 Minute chart at 8:00 am on the 23rd and 9:30am today.

 

MACD Signal crossed over as I expected it might on the 22^nd. The market has now pushed below the10 Day MA and the 20 Day MA stands as a target, currently stalling at 1042.6. The market reached 1049.4 for a low at the start of this writing and is setting new lows as it continues to head south.

Today’s prices touched the 10 MA on the downside at 1057.It has been riding on the top side of the 10 MA since October 5^th until October 16^th when it hit the 10 MA at 1050. This move down was a pull back from 1072. The bounce up hit 1070 yesterday. The high today is 1065.7, but the white bar has penetrated the 10 MA. Next target may be the 20 MA at 1034. RSI at 68.10 is pointing Bullish, but the MACD Histogram is almost flat and the MACD Signal could cross over to the downside with a little more downward price action. Tomorrow will give us more info.

An article in Barron’s Magazine weekend edition stated the Fed should raise rates because the economy could take it. The question is, “When?”

 

Bernanke has some tools to use to increase confidence in the dollar and stop inflation. The use of “quantitative ceasing” statements hasn’t helped in that no one knows the exact amount of issued dollars in the “easing” phase. Some harder balls need to be thrown now to stop the drop in the Dollar. Otherwise inflation as reflected in gold and crude oil may become out of hand too quickly to control. Panic may be setting into the psyche of the equity trader and a massive selloff in the Indices seems immanent.

 

Bernanke stated “colleagues and I at the Federal Reserve believe that accommodative policies will likely be warranted for an extended period.” The recovery in the economy will “not be robust enough to stop increasing unemployment” currently at a 26 year high. “Overall, the Federal Reserve has a wide range of tools for tightening monetary policy when the economic outlook requires us to do so. We will calibrate the timing and pace of any future tightening together with a mix of tools to best foster our dual objectives of maximum employment and price stability.”

 

Unemployment is projected to peak at 10.5% by the first quarter 2010. And even though Bugsy says the recession is most likely over and the deep depression is averted, a mistimed interest rate hike could upset the upward trend in economic growth. Wholesale prices would fall with a stronger dollar and the Fed doesn’t know how to control deflating prices.

 

One thing is for certain, when the level in the US Dollar reaches critical mass and starts imploding at an exponential rate, the Fed will raise rates. When? Soon.

 

Lately I have been wondering if China would get around to bringing commodity exchanges to their country to offset what it must view as total Western dominance of Gold, Oil, Copper, and Soybeans. Then, this afternoon, Bloomberg’s top story is: “China Nurtures Futures Markets in Bid to Sway Commodity Prices”, in which it is revealed the increasing popularity of Chinese exchanges.

 

This news comes at a great time since the US Congress contemplates legislation to “tax Wall Street” by taxing each equity transaction up to 0.25 of the “value” of the transaction as punishment for all the economic strife caused by Goldman Sachs, Morgan Stanley and all the other Broker/Banks who collected Billions of dollars in bailout bonuses at the Taxpayer’ expense. So, taxing the taxpayer/trade makes total sense (if you are a member of congress).

 

Hopefully, the Chinese Exchanges will accept outside speculators to 1) get the NYMEX manipulation of Energy prices under control; 2) stop the Central Banks manipulation of gold; 3) stop Goldman Sachs power trading (some call it carpet bombing) of commodities; and 4) stop speculative trading here in the US and therefore eliminate the liquidity of the commodity markets. Nothing is better than competition.

A Futures trader wrote in to me, “I’m good at making a profit, but I can’t take a loss.”

 

Generally, this is the opposite of what people are capable of doing. They don’t know how to take a profit or when, but they can take losses in enormous proportions to their profits. It really comes down to lack of a trade plan.

 

A trade plan, a plan that cannot fail, has three parts: 1) entry, 2) exit at profit, and 3) exit at loss. It can’t be that simple, yet it really is. Entering the trade for the same reasons every time (automatically) means that the same criteria for entry is perceived and acted upon. Therefore, the trade has potential, but no guarantee. The trade also has been entered many times before with good and bad results yielding a track record. If no record of overall results exists, then why keep trading it other than to establish a record of results?

 

According to these records, traders then have knowledge of when the trade has reached a point of limited success. This is where the stop should be placed. They also have knowledge of the point at which the trend is playing out and about to reverse, taking back profits. This is the point at which the profit target should be placed. Everything outside these parameters is conjecture or intuitive and therefore subjective.

 

At the subjective point, fear and greed take over. The plan that cannot fail is abandoned for speculation. No plan exists from there forward.

 

This is the way most people trade.

If the same entry resulted in consecutive profits of $5, $10, $3, $2, $5, $10, $7, and $6 and consecutive losses of $25 and $25, then the ratio is 80% win/20% loss, but the loss is $2 every 10 trades.

 

This is the way most professionals trade.

If the entry yielded average profits of $10 20% of the time, and 80% of the time had average losses of $2, then the ratio is 20% win/80% loss, but the net profit is $4 for 10 trades. Yes, the $5, $3, $2, $7, and $6 profits also stopped out for $2 losses because the draw down to $24 was eliminated. The comeback to those profits couldn’t happen, but then, the $25 loss couldn’t happen either. It’s called “cutting your losers, letting your winners…..”

 

In reality, most successful professionals are on automatic and immediately set a stop and let the winner run as far as it can. They manage the trade, but with a very small loss potential. They know it’s a numbers game. They live to play the entire schedule of appearances. Most amateurs play only once, blow the account. Fund the account to play three or four more times. Blow the account. Fund the account. Blow the account. Give up and say, “The market took my money!” That too is wrong….a professional took it.

 

 

Grains: The U.S. Department of Agriculture on Friday will release its October Crop Production Report. A huge corn crop is expected. Perhaps Corn prices will recede because of the mammoth size of the crop, but the Ethanol Industry never had it so good. Prices have fallen since the high in 2008 of $7.65/bushel to around $3.70 today and lower prices certainly make better profits both in green fuels and Cattle.

 

At the same time, Cap and Trade legislation and California’s recent ruling to slash emissions of “plant-warming” fuels may stop Ethanol in it’s tracks with restrictions of its use through high taxation or (probably) the lifting of tax subsidies, tax breaks and a $0.54/gallon tarriff on imported ethanol. At least we know we have 100+ years supply of something we won’t be able to use.

 

Rising Gasoline prices are due since the average price of crude oil is around $70.00 per barrel which is up $10 per bushel since July. That rise could help bolster profits ever further.

 

A side note: All CME markets will close tomorrow (Friday 9^th) at 3:15 for Columbus Day Holiday (Monday, October 12^th). All markets will be open Monday, Columbus Day . Boy, these guys know how to party.

Strategy Testing Template

 

Name:  Ron Smith

 

Name of Strategy: The V pattern

 

 

1. In your own words, please write a detailed description of your strategy:

The V pattern begins with the day’s high posted on low volume just prior to the pit markets opening bell. The market plunges through all overnight and current trading session support to the low of the day reaching at least 85% of the ATR. As abruptly as the market fell, it reverses and posts a new high of the day within the same time frame as the plunge down.

 

2. What trade style would you classify trade strategy?

Usually, this is an extremely active trade. It might be better called an extremely attentive trade style.

 

3. Typically, what type of profit potential do you see in this strategy?

Total potential is the range of the day. Usual profit is half ATR.

 

4. Typically, what type of loss or risk could occur with this strategy?

Loss can be minimal if a long position is initiated as soon as recognition of the pattern occurs. Stop is $500 for the e-mini Russell.

 

5. Is there any particular time of day that you would like to trade this strategy?

Generally in the morning in the Indices the pattern occurs around 9:15a.m.

 

6. Are there any times you would NOT implement this strategy?

This formation may be seen in any market on any chart which is why John Murphy* called it a “non-pattern” because it is usually recognized in hindsight.

 

7. Which pairs/stocks/commodities would you consider trading this strategy?

Indices, Crude Oil, US Bonds, and COMEX Gold

 

8. What is your “Light Setup” for this strategy?

The pattern may appear on as small as a one chart. Whatever chart on which it appears entry timing should be no later than the end of the second interval of that chart.

 

9. For each chart, please define what you need to see to enter the trade? i.e. FAS, Angle, Angle and Separation, etc.

 

1) A sideways or ascending channel with a high posted on low volume

2) A sudden reversal of market trend, plunging (like my paycheck in inflated dollars) through support to a new chart low.

3)  When reaching the new bottom (this needs to be at least 85% ATR daily basis) the market can be seen turning up.  

4) Entry must be before the end of the second entry and preferably immediately after the second interval begins.   

 

10. Is your exit strategy based on price or charts?

5) Stop is below the low of the turn.    

6) Target is a tick above the previous chart high.      

7) Time frames must match. If it took 90 minutes to reach the new low, it should only take 90 minutes to reach the new high, or get ready to bail.  

 

11. If your strategy is based on charts, define what look you need to see to exit the trade?

 

12. Is there anything else that should be considered when looking at trading this strategy?

The trade must be constantly monitored.

 

Please Include at least (3) examples of your trade journal on both entering and exiting the trade, as well as your Trade Manager showing entry/exit.

 

This strategy was first introduced at WizeFest 2007 in the “Naked Strategies” breakout class. It is on WTV in the “Advanced Strategies” course on Wizetrade University.

 

* John Murphy, Technical Analysis of the Futures Markets, Page 131.