The Wizetrade Commodities Blog

Keeping Things in Perspective, Part II

By Scott McCormick, CMT

            In part one of “Keeping Things in Perspective” I focused on the actual returns of the SPX, Gold, and the U.S. Dollar Index.  I also alluded to the fact that I have been noticing changes in short term market behavior, the same thing that lead me to conduct a long-term analysis of the SPX this time 2008.  Another reason why I feel compelled to look at things from a longer term perspective is because of the type of commentary that I have been hearing regarding Gold and the DX in particular.  What I found is important, and could possibly impact all markets over the next three months. 

            The Standard and Poor’s 500 Large Cap Index, has risen 63.4% in the last 8 months (6 times the current average annual expectation for the SPX) from it’s March 2009 low of 666.79 recovering roughly 50% of it’s overall decline from the October 2007 high of 1576.09.  Obviously the trend since March has been up, but relative to the October 2007 high the trend is still down, and we have approached an area that represents relatively little reward for the Bulls, unless it breaks out beyond the resistance levels that we have approached. As trend analysis goes, the SPX has been bumping up against a downtrend line which is connecting the October 2007 high to the May 2008 high.  In addition to testing this trendline the SPX is also trading at or near three different Fibonacci levels ranging from 1115.07 to 1135.87 (a closing above 1135 should be significant).  The rally since the March low has been accomplished in two swings on the weekly chart.  The first swing was from the March low of 666.79 to the May high of 956.23 (roughly 289 points) and the second swing from the July low of 869.32 to the most recent high last week of 1113.69 (roughly 244.37 points).  As swing analysis goes, typically you will find that the market will move in swings of three to five waves, and swings one and three tend to be approximately equal in length.  If this holds true again the difference between swing one and swing two is now 44 points, or roughly 4% of the SPX’s closing price from November 25, 2009 which would be a target of roughly 1158-1160.

            As I pointed out in the performance numbers since October 2007 Gold has been the better performer on a relative basis to the SPX. What is concerning though is that not only is it reaching all time highs, but the trend has been accelerating, which creates a parabolic appearance.  When one thinks about markets going parabolic thoughts of Crude Oil in 2008 and the Nasdaq in 2000 come to mind.  In comparing the angles of those other parabolic markets to Gold I found that from the Nasdaq lows in 1987 to the highs in 2000 the angle of ascent was 38 degrees (a normal market is closer to 45 degrees).  Crude Oil’s angle of ascent from it’s lows in 1998 to its high in 2008 was approximately 31.5 degrees.  Currently the angle of ascent of Gold is 33 degrees from it’s 1999 low of 253 to it’s current high of 1187.  Now just because the angle is this steep does not mean that Gold is going to stop tomorrow, but since it is trading at an angle greater than 45 degrees it is showing a rather irrational market.  In percentage terms comparing the three moves, the Nasdaq rallied 1700% from its 1987 lows, Crude Oil rallied 1300%, and so far Gold has rallied 469% since it’s lows.  In comparison to the other parabolic markets Gold looks like it has more to run, which it may, but not without increased risk.  One of the tools that I prefer to use to get specific technical levels at which Gold may encounter resistance, in this case, is a Fibonacci extension.  Based on swings on the monthly chart going all the way back to 1970, Gold may encounter short term resistance near $1229 to $1256, should the commodity rally through these levels the next cluster of Fibonacci levels comes in at $1458-$1495. 

            While the focus has been to the upside for the SPX and Gold, it’s is just the opposite for the DX.  The DX has been in decline since July 2001, with some interruptions along the way, most notably the rally from December 2004 through November 2005, and more recently the rally from March 2008 through November 2008 and March 2009.  Although my focus is on the actual continuous futures contracts of the DX, please remember that it is an index of 6 currencies so when analyzing the DX you have to consider all other components as well.  Although it is beyond the scope of this blog the weighting of the Dollar Index is as follows: Euro Dollar 57.6%, Yen 13.6%, Pound (Cable) 11.9%, Cad (Loonie) 9.1%, Kronas (SEK) 4.2%, and Swiss Francs 3.6%.   The largest weighted currency is the Euro, and second largest is the Yen.  Should the Euro and Yen both encounter resistance it would provide a great deal of support to the DX.  As support levels go for the DX the big one is it’s March 2008 low of 71.05, but it may also find support before reaching that level.  The first breakout for the DX occurred at 72.64, the second breakout at 74.06 as it worked out of the lows in early 2008.  In addition to these price levels a Fibonacci level of 74.95 and 73.12 may provide support.  As of this writing the DX is trading below 74.95, but what needs to be watched is whether or not the index recaptures this level without moving to the support levels below it, this would be a sign of DX strength. 

            So what is all of this saying?  I am stating that the current up-trends in the SPX and Gold remain in tack, and the down-trend in the dollar also remains in tack.  However all three markets have approached levels that represent higher risk for staying in the trade, than getting out, and as the markets approach resistance levels and support levels it increases the possibility of profit taking in the equity and gold market, and short covering in the dollar.  What I mean by increased risk to stay in the trade is this; if you consider your reward to risk ratio in your trade as your trade risk the closer the trade gets to the reward target to more risk is present in a trade.  This will cause market participants to seek profit taking opportunities or look for breakouts above resistance or below support levels which changes the dynamic of the reward to risk ratio back into the favor of reward. Having provided the resistance for the SPX and Gold, and the support levels for the DX it is also necessary to know the opposite side of the trend that would indicate a possible reversal, and therefore confirmation of the levels provided.  Currently the short to intermediate support level for the SPX is 1019-1029, Gold is 1026.90, and a breakout above the resistance of 76.50 for the DX could indicate again that the markets may be reversing.  Keep in mind that in order to reverse an up-trend the market needs to make a lower low and a lower high, and for a down-trend reversal a higher high and a higher low needs to be made.  So the levels mentioned should simply raise your awareness that something is happening, not that the trend has actually revered.

Are you ready for this? Copper! Old High Grade out performed every other tradable contract since December 2008. From its low in December of 1.274, Copper has risen 150% to 3.179. Ok, get picky, it’s 149.1%. In dollars terms, discounting the fall in USDX value, its contract value is up $47,250 on Initial Margin of 6,075. If copper is a barometer of global economic health, we must be okay.  

Second on the list of gainers is Silver; up 67%. Silver far exceeds Gold in percent gain. Heating Oil is up 65%. Crude Light brought in a 42.28% increase so far this year. NASDAQ leads the indexes with a very good 42.86% followed by the Russell’s 38.27%. Finally, COMEX Gold gained 35% 

The biggest loser so far this year is Natural Gas with a current 38% loss from last year. Running second is Wheat, down 20%, third is Corn down 15% and Lean Hogs down 13% for the year. 

The gainers this year far exceed the losers and the prospects seem good for the trend to continue as long as the dollar drops.

At this time a year ago the equity market was looking into the abyss, and today I heard commentary that gold is going to the sky, that money should be put into equity markets around the globe, and that the dollar is never coming back.  The polarity between the news from last year and today is startling. The current commentary may be true, only time will tell, but it amazes me how quickly market participants forget where the markets have come from (which is why patterns repeat over and over again in the market).

A year ago after buying shares of the SSO (Proshares Ultra Long SPX ETF) on November 14^th and November 21^st, ironically, I thought that I should conduct a long term analysis of the SPX because I began to notice a change in the short term behavior (bold on purpose) of the market going into those two days.  On Monday November 24th I put together what turned out to be an internal research report for the local branch of my old firm.  I had concluded that the November 2008 low was a 5^th of a 3^rd wave, for you Ellioticians out there, and that the equity market should bounce form the November low of 741.02 for the SPX (market rallied 27% over the next 7 weeks).  We all now what happened from there, but I thought that it would be interesting to look at the last year’s percentage changes in the markets that seem to be getting all of the headlines, the SPX, Gold, and the U.S. Dollar Index and put things into perspective with the longer term picture.

                On a closing basis, the SPX from the closing high (1565.15) in October 2007 to the closing low (676.53) March 2009 fell some 888.62 points, or 56.78%, in 17 months. Since the March low the SPX has rallied 429.12 points, or 63.4%, in less than 8 months.  Over the course of the last 25 months the SPX is still negative by 29.3%.  During these same periods Gold was able to provide positive returns, but not without some volatility along the way.  From October 2007 through March 2009 Gold rallied 23%, from March 2009 through November 2009 it has rallied 28%, and overall for the last 25 months it has rallied 58.4%.  Even though gold performed well relative to the SPX during all three periods, please remember that Gold also declined from 1033 in October 2008 to its lows in March 2009 at 681 (a decline of 34%).  The U.S. Dollar Index (DX) showed relatively smaller swings during this same time frame.  From October 2007 to March 2009 the DX actually rallied 10.95%, not bad for an economy that looked like it was going to sink into the abyss. As the U.S. Government stepped in to keep the economy from sinking the dollar began its slide from March 2009 through November 2009 and so far has declined 15.7%.  During the scope of the last 25 months the DX is down 4.32%, again not bad considering where we have been, and what may come.

                So where does this put the markets now?  On a relative basis Gold continues to outperform equities in the long term (last 25 months), however in the short term (last 8 months) equities have been beating Gold hands down proving to be a better bet against the threat of inflation (the same lesson that was taught to the markets in the early 80’s).  Both the SPX and Gold continue to outperform the DX.  So this is what the trade has been, own more equities than gold, and own more of both than U.S. dollars.  How long this trade continues is anyone’s guess, but just like I began to see a change in behavior of the short term markets last year, I am again noticing changes in the short term behavior now for all three markets, not just equities.  In the following blogs I will provide a closer long term technical look at the three markets to keep things in perspective.

Thanksgiving is my favorite holiday although to my knowledge it is of no real significance to any other country other than the United States. It speaks volumes as to the difference between the United States and all the other countries in the world. If I started listing items for which I can give thanks, so many could be called trite because they seem commercialized into insignificance, but the one thing that heads my list: I am thankful for friends and family.

The main text in the volume of differences between the US and the world is not celebrating another conquering of another vicious enemy, or some successful high risk space conquest, nor even some religious holiday. It is that on one November day, we as a nation are thankful for Food, Friends and Family; nothing more than just friends and family sharing a meal together. Wouldn’t everyone want to celebrate that?

So to you, my Wizetrade friends, I thank you for being here with me all the other working Thursdays of the year, and I hope this Thanksgiving Thursday you are able to visit with your friends and loved ones over good food. It’s the best thing in life.

QUESTION: I opened candlestick charts for Natural Gas.  I was using a day chart, a 60 minute chart, and a 240 minute chart, in order to compare what happens with the RSI and MACD and Stochastic on all of them.  My question has to do with any price rises in Natural Gas.  On the hourly chart and the 4-hour chart, we get into a high range on RSI and MACD, etc if we get just a 10-20 cent rise in price. 

Little wonder we cannot get a more prolonged rise in price because traders see the overbought signal and immediately sell it off, and hence we keep getting lower bottoms.  At the lower bottoms we finally get an oversold indicator, and thus the sellers lay off for a while.  All the while, on the day chart, the RSI and MACD and Stockastics give us a way oversold reading for the past couple weeks.

If we are to ever mount a sustained price rise in Natural Gas to get it over $5 again and approach $6, which is where I think it ought to be for winter, how are we to get a reading on the 60 and 240 minute charts that are not overbought so that the sellers don't come in and sell it off again?  Will we get such a chart?  Or do we just have to have a prolonged overbought reading on these two charts in order to get the day chart to finally rise above its oversold area and rise up above the 50 mark finally?  And what should I be watching for to know that "this time" it will work and the sellers won't come in and sell it off based on the overbought readings on the 60 and 240 charts?

ANSWER: There are several points I want to address:

1)       The rises you are seeing in Natural Gas in the 60 and 240 seem to be counter trend moves. These may represent sellers taking profits rather than a sudden demand spike backed by massive buying. If I were being forced to sell (fill) from a short seller’s initiated buy order, I would want a pretty good premium in there for what I know may be a precarious position. The difference in the bid-ask may be greater than normal and if the seller “markets” out, the jump up in price may cause lagging indicators like the MACD, RSI and Stockastics to react violently due to the sudden reversal in trend in the lower minute charts.

2)      The change in direction for the market may come about with continued RSI in extremely high ranges while the market continues to move higher in price.

3)      Your conviction of a $6 fair price may be accurate and not come about for six months or after the market has fallen to $2.25. If it reaches the $6 price level, it will happen when it happens, not necessarily when or if we want it to. It is what it is.

4)      Bottom or Top trading requires deep pockets. It is contrarian, the riskiest of trading and the rewards can be fantastic if one is willing to take a series of losses before catching the favorable trend. The contrarian must use proper money management techniques to preserve capital until the tide turns.

The general trend for all commodities is up (according to lights and charts and price action) with the exception of Feeders and the USDX. The dollar, with today’s low currently at 74.965 is testing out last week’s low of 74.855. This is the trend and the trend is hard to stop. More downward price action past 74.855 may confirm the continuation toward 71.05.

The Global Oil Scam featured in “Seeking Alpha” by Phillip Davis describes a conspiracy to inflate the price of oil by Goldman Sachs, Morgan Stanley, British Petroleum, Shell Oil, Deutsche Bank and Societe may have ripped of $2.5 Trillion in the scam. The Intercontinental Exchange (ICE) is currently the source of “dark pool” trading in the commodities and futures markets. See story: click here It operates outside the US and is therefore not regulated by US laws.

The IEA says rising Crude Oil prices risk derailing the global economic recovery. See story: click here. The Paris-based agency said it expects global demand to rise next year, revising it’s outlook for consumption by 140,000 per day. At $79/Bbl , crude is up 78% this year.

Another subject of debate, “peak oil” which is of dubious credibility, found some legs with the revelation data by a whistle blower at the IEA of a distortion of global inventory and of US Department of Energy duplicity and possible pressure on IEA in the concealment of shrinking inventory numbers so as “not to scare” the Americans. See story: click here.

So, the question is: Did speculators, accused in the first article of price manipulation and rip-off, trade based upon conspiracy to shove crude oil prices artificially higher, or were they taking advantage of supply/demand fundamentals to shove the price of crude oil higher, or both? Are they now saying that rising prices will slow the economy or will it just be the lack of enough oil, or both?

The truth is crude oil prices are higher.

In other news

The total volume of side-by-side trading in CME pit-traded Meats and Lumber futures is indicating with consistency that the electronic trading volume on Globex has become the majority of the entire volume for these products. Effective Tuesday, December 1, 2009, clients using MF Global's Mtrade and EXPRESS front-end platforms will have Meats & Lumber orders directed to the Globex trading platform. As of the close on Monday, November 30, the pit-traded symbols for these products will be disabled in both Mtrade and EXPRESS.

See, we told you the Meats would eventually go all electronic trading. The pits are dead. They just don’t know it yet. Go Electric Meat!

I just reviewed the Wizetrade "Trade Simulation" workbook and also the "Quick Ref Guide" for the Intra-Day Trading Style. I bought all the Trade Simulations and I feel the Commodities Simulation was done the best!
 
The time periods as you know are 15 min FAS, 10 min AS, 5 min FAS and 3 min AS.
 
But I am confused in the proper priority order in evaluation the time periods?
 
For example, do you watch the 3 min light for a FAS every 3 minutes (even 3 minutes on the wall clock i.e. min 03, min 06, min 09, min 12 etc?). Then when there is a FAS then look at the 5 min for angle an separation on the even 5 min interval, then work your way up to the 10 min and finally the 15 min on an even 15 close of clock time?
 
OR, do you start with the 15 min time period on the close of the 15 min clock, i.e. min 15, min 30, min 45, etc? Then if there is a FAS on the 15 min, do you then look at the 10 min, and 5 minute periods for the FAS and AS?
 
I guess, I am confused on how to sequence the order for evaluation of the lights, because, I want to have consistency in my trading plan.
 
This has been a major problem for me ever since I bought Wizetrade Commodities four years ago.
  
Thanks for all your help.
 
Sincerely,
 
Edward Jacques

You have a great question, Edward: Timing, do I know it when I see it?

In the first progression, you are right; smaller lights make bigger lights. In the second instance, the trend must have started in the 5, then 10, and now the 15 minute chart and is worked its way through to the 45 minute chart. Both are correct if you are looking at a fresh interval in the 15 minute.

I see them as a group. Are they in alignment right now? If not, why not? What does it take to bring them around? Is the 10 minute FAS too old? Is the 30 FAS too new? So, I look at the smaller light’s charts to give additional info before I enter. But, you are right, the 15 needs to be a new interval.

This is why I like Jim’s Single Method so much. Either it is there or it isn’t. No ifs or buts. You have it or you don’t. Simple!

Recently I had an opportunity to sit down with the head of an international security firm for civilian transport vessels. Although the discussion of pirates around the Horn of Africa was the main topic, eventually the subject drifted to American oil supply. There were some eye-opening comments made by him as to the extent of a crisis developing for US consumption of oil.

Because of the continuing limits to drilling on US soil from environmentalists backed by Middle East-OPEC money, the US is going to find itself outside the loop on oil inventories. Because of our foreign policy in the Middle East, we are fighting a losing battle on every front, politically, socially and militarily. Even if we are victorious on the battlefields, we have been out maneuvered by Britain, China, Russia and Iran.

Iran is now in control of southern Iraq’s oil fields and eventually will take total control of the entire country including the Kurds. Its influence is greater than the Saudis, and if Iran wanted Saudi Arabia as a satellite country as Iraq will soon be, it could take it. Its ability to spread descent, coupled with guerilla warfare (Hamas and Hezbollah) to dismantle governments as it did in Syria and Lebanon and is doing currently in Palestine and Afghanistan makes it the most powerful nation in the Middle East. It was formerly known for centuries as Persia. The Persians were “king makers” as described in the New Testament as Magi. No king had permission to become king, even of Israel, without their consent.

Iran is running out of oil like the Saudis, hence their determination to have nuclear power and, as a bonus, nuclear weapons. Iraq arranged for Great Britain and China to develop its huge oil reserve. Thanks, US Army!

China knows it needs Natural Gas now and more in the future, and the nearest, largest untapped field is in the Persian Gulf bordered on the north by Iran. There will be a need for a pipeline from Iran to China. The shortest line runs from the Persian Gulf through Iran, Afghanistan and Pakistan to China. Get the picture? Afghanistan has been partially occupied by US led “coalition” troops since 2001. Pakistan’s allegiance to the US is deteriorating daily as war has broken out with Al Qaeda.  Pakistan’s days are numbered. China wants a new world reserve currency to replace the US “deteriorating” Dollar. Who comes out the winner? Iran.

I'm watching Sugar trade near the bottom of its range on the Mid Term Chart asw e continue to see strong equity markets and a weak USD along with increasing energy prices.  At the G-20 summit in Scotland this weekend, the Finance Ministers vowed to maintain stimulus towards recovery and this has encouraged both equity and commodity investors.

Keep in mind that coming up from support on sugar is counter the current selling pressure, as sugar prices have never regained the $24.85 highs from many weeks ago at the end ov August.  he Range is defined between 20.50 low and 23.50 high, Trading near 22.40 this morning.

Corn prices today are down in spite of a weaker dollar. Unusual circumstance, but not that uncommon when grain harvest gets dry weather. This year’s reported corn bumper crop may see a steady decline in price if harvest proceeds and approaches the normal schedule. No buy, hold, or sell here, just an observation. December Corn currently is 383 '0 which is the middle of today's range.