Friday, January 18, 2008

Economic Stimulus: Are These People Insane?

The blowhards in Washington have now decided that since the economy is slowing down, it is their obligation to do something about it. And what's their answer? Send free money to everyone! They will now print -- or borrow -- more fiat money, so that they can send everyone some of that free money.

Sounds like a helicopter drop to me!

I have a better idea. Why don't they just print more money and send a check to every American each month, and we'll all just stop working and live off the "economic stimulus" checks each month? Then, we can all sit around watching TV and playing monopoly with the play money the government provides to each of us to live on. We'll just sit and get fat waiting for our monthly "economic stimulus". Absurd thought, isn't it? And yet the politicos make it sound soooo good when they couch such absurdities in talk of "packages", percent of GDP, timeliness, etc. It's still free money -- responsibility-free!

How long can we simply print more money, without any plan for earning it, and just give it away, without the chickens coming home to roost? Eventually, simply creating more and more paper money, and more and more debt, won't work any more, and the house of economic cards will collapse. When Americans begin to realize that all this money is just created from thin air, they will lose confidence in it, and hyperinflation will be the result. No one will want to accept it because it will be just paper. Heaven help us all when that day comes!

Note: while the graphic indicates when Ronald Reagan took office, it does not indicate that Reagan begged and pleaded for the Democrat-controlled Congress to cut spending, but they never did. The Constitution clearly states that Congress is responsible for the budget and spending, not the President. Reagan still signed the appropriations bills, however. At best, I suppose we can affix blame to both parties. During the Bush years, however, the exploding deficit and spending could only be laid at the feet of the Republicans. That's why neither party, in my view, has any credibility left in talking about controlling their spendthrift ways. It's all just talk!

The creating of more and more paper money, combined with mailing all this new money to everyone -- a helicopter drop -- will just create more and more inflation. (See the purple-colored graph.) Our government hopes that it can simply inflate its way out of economic distress. The danger is that throughout human history, eventually, every system of fiat money has lead to hyperinflation as the citizens realize that their money has no foundational value, and they spend it as fast as they can acquire it, leading to hyperinflation and eventual collapse into worthlessness. Those who are unwilling to learn the lessons of history are doomed to repeat them!

Volatility falls; Now We Wait!

In the 3 min chart in the left side of this screen capture, we can see that volatility has fallen too low to trade. Even though good movement remains in the right side, the risk/reward ratio doesn't merit taking new trades until volatility rises again.

And still another long!

I keep taking these trades as long as the slope of the movements and the volatility remains high enough to continue. How do I know when volatility is insufficient? In addition to the Bollinger Squeeze indicator, I watch for the slope of the previous movements to slacken. If, following a long trade, I take a short trade that doesn't make money, I assume that volatility has fallen to a level that is too little to make money, either long or short. I then await the next break-out.

Another short trade

These trades are only good for $100-$200 per contract, but add up when they are summed up at the end of the day. They key is to watch both prices breaking through the Exponential Moving Average and the Klinger+ATR indicator, which usually gives a prescient hint at changing sentiment, as it did in this case. If the Klinger indicator changes color against my position before I have more than 5 ticks of profit, I immediately tighten my stop to the last high or low of the previous candle. I will exit if prices reverse through that high or low of the previous candle. Usually, I can break even. The other key to making consistent profits is Phantom's Rule %1:

Assume it is a bad trade until proven correct. Positions established must be reduced and removed until or unless the market proves the position correct!

In essence, this rule is saying that he who loses least, wins best!

Tick charts a necessity today

If I didn't use tick charts, trading today would be impossible. Tick charts, instead of being oriented toward time intervals, print across the screen based upon the orders coming through the exchange. Imagine trying to trade this chart (3 min chart) without the tick charts shown in my first posting today. Those charts, based upon orders flowing through the system rather than time intervals, were very smooth and clear. This chart, based upon 3 min time intervals, is very erratic and would be almost impossible to trade profitably.

Soybeans #6 broke even.

After breaking even on this one (trade commissions covered), I am sitting out now until the markets start to move. This trade was an error, since the Bollinger Squeeze indicators (not shown, but appears in the panel beneath these two) had turned red, indicating that volatility had fallen below a level acceptable to initiate a new position in any direction. It looks like prices will break lower, since the soybean bulls are unable to sustain any price strength today.

Soybeans: Quick trades, healthy profits!

In the opening half hour of trading, the soybean bull trend appears to have broken down. Here are the first five trades of the day. The second long lost money, but only a couple of ticks (in the middle of the second chart, I went long, and got out almost as fast); the others have all made money.

Now that it appears the the soybean bullish trend is finished, fast, agile trading in both directions is the order of the day. As a swing trader, this is my specialty. I like trading both directions, as I can make money going both long and short.

Thursday, January 17, 2008

Head and shoulders top?

Here depicted is what appears to be a possible head and shoulders top for soybeans today. However, longer-term charts still show no top.

Soybeans, grains move higher still in day session

This chart is not a repeat of the chart I posted last night. It is, rather, similar in appearance, but with still higher prices (note the price differences at the right of the chart).

Wednesday, January 16, 2008

Grains Higher in Evening Trading

All the grains (wheat, corn, soybeans) have moved higher during evening trading today. Often, they seem to move in sympathy with one another. Look at these three charts from tonight's trading to see how strikingly similar their charts are. You probably couldn't distinguish between them except by the prices at the right of the screen, since their patterns are so similar tonight.

It is my understanding that price strength in the grains tonight is largely due to a misunderstanding of a dovish speech given by one of the ECB (European Central Bank) officials that caused the US Dollar to rise yesterday, who has now clarified that statement, causing the US Dollar to fall again and commodity prices to respond by rising.

Wheat recovers completely

Surprisingly, wheat has completely recovered today. As the weakest of the grains, it seems odd that it was the only grain that recovered prices sufficiently to close at close to the same price where it began the day. Both soybeans and corn closed significantly below there settlement prices from yesterday.

Conflicting signals in soybeans

Look at the two blue boxes in these two charts. The one in the left panel shows heavy buying activity in the soybean complex. The one in the right panel indicates stagnant market conditions in which neither the bulls nor the bears are able to establish dominance. Note that prices and the Bollinger Bands remain flat. The red dots along the zero line indicate poor volatility, and thus, bad trading conditions. Conflict in signals usually means consolidation.

Great Article on Inflation and Deflation Causes

All Signs Point to More Inflation

I recommend the above article for readers to better understand the impact that Fed policies and excessive debt has on prices. Investors would be wise to read and understand these impacts.

Commodities Rout!

Soybeans and wheat both reached their lock limit down prices today within 30 minutes of the market open, and are now beginning to move back up again.

CPI Moves Higher, Stubbornly Above Fed's Target Rate!

CPI as reported for December is up, but not by amounts that set off alarm bells! December CPI was up .3%, and annual CPI was up 4.1%, the highest in 17 years. Of course, we all know that CPI is grossly underestimated, and that the Fed ignores total inflation, ignoring food and fuel costs. The real inflation rate is closer to 7-8%.

Paul Volcker has also criticized the current Fed leadership today. Where is the man, Volcker, when we need him? The Volcker Fed was far more effective, and didn't pander to Wall Street.

This CPI report will probably encourage continued Fed easing of interest rates. This alone will probably cause commodities prices to rebound higher, since continued devaluation of the US Dollar is a natural consequence.

In the minutes following the CPI data release, gold and oil prices are moving higher, and the US Dollar is moving lower. Surprised?

Broad-Based Commodities Price Weakness

Today we are seeing very broad-based commodities prices weakness. I wrote a posting last week indicating that volume indicators were showing some weakness, but today, we are seeing not only volume indicators showing selling activity. We are seeing prices fall in crude oil, gold, all the major grains, and most of the major softs, including sugar, cotton, coffee, and cocoa. In addition, I have been observing falling open interest, which is slightly predictive of a sell-off.

This may be significant. To reiterate, we are seeing three phenomenon occur simultaneously in numerous commodities in fuels, metals, grains, and softs:

  • Falling prices
  • Selling-based volume in the Klinger volume indicator
  • Falling Open Interest
Often, commodities show price retracements in the face of a recession and growth contraction in the business sector, and demand for many commodities wanes. Is that what we're seeing now? I don't know! Perhaps this is merely a one-day or temporary phenomena that will eventually give way to the continuation of the commodity bull market. But I am certainly beginning to wonder, especially since the volume indicators, which tend to be quite leading and predictive in nature, began falling a week or so ago on the daily charts. Now, we are seeing falling prices across the board joined with falling open interest in addition to volume indicators showing distribution. This is a time for perhaps more short-term trading and greater alertness and caution. Coming days should be interesting for commodities traders. The easy money may be coming to an end for longer-term traders.

Tuesday, January 15, 2008

Wheat, Please Meet Fibonacci!

Wheat prices today have reached the same Fibonacci level where they have retraced to lower prices in recent days. See here the daily chart, where you can see the Fibonacci levels from the most recent rise in wheat prices. I expect to see wheat prices fall from this level, as they have previously!

Odd Switch: Wheat Strong, Soybeans and Corn Weak!

Today is showing some unusual tendencies, with wheat (first chart at top) showing some price strength as it approaches the magenta-colored line that represents today's upper lock limit price, while soybeans (chart 2) and corn (chart 3) were unable to hold their highs, and are showing signs of weakness. Perhaps the recent rises in corn and soybeans prices are somewhat overbought! They sure looked like it the past few days, with soybeans prices rising -- and then falling again -- more than 50 cents in two days. At the time of this posting, both corn and soybeans prices were trading below yesterday's closing prices, represented in the charts by the pink dotted lines. I expect the volatility to continue, and intend to profit therefrom.

Great Grains! A Tick in Time Saves Money!

Good volatility in grains in the opening minutes of trading today makes for healthy profits for traders. Volatility provides for profitable trading. These are superb conditions for profitable trading! However, it wouldn't be possible for me if I was using only the traditional time-based interval charts. Today's trading helps to make this point very well!

Contract-Based vs. Tick -Based Charts

As I have mentioned in previous postings in this blog, I trade primarily using tick charts, which are drawn by counting orders moving through the exchange system, rather than based upon time intervals, as most traders do.

There is also a third alternative -- volume-based charts. Volume charts don't count orders, but rather, the volume of contracts themselves that are being processed through the system. They tend to have an appearance similar to the tick charts. Volume chart candles are based upon the number of contracts being bought and sold, whereas tick charts count the orders being processed. There is very little difference in these two charts, and if I fine-tuned the volume chart on the left just slightly, the difference might very well disappear and slide into meaningless oblivion.

Time Interval Charts vs. Tick Charts

In my triptych, I use time intervals as well, but my trading is done primarily on tick charts. Perhaps it would be more accurate to say that I use both time interval charts and tick charts. If I was forced to choose one or the other, however, I would choose the tick charts because they are immediately responsive and sensitive to the markets, and instantly respond to subtle changes in market sentiments.

The chart shown at right shows a 3 minute time interval chart on the left, and a 30 tick chart on the right. Clearly, the tick chart shows much greater clarity when the shift in sentiment occurred, and allowed me enter and exit the market with much greater accuracy in my timing, and thus, better execution of my trading strategy.

The tick chart permitted me to place two trades -- one quick short trade at market open (just 2 minutes in length), and a much longer long (and even more profitable) trade a few minutes later -- whereas the time interval chart on the left would have only permitted me to place one long trade. If I had traded using only the 3 minute chart on the left, I might have lost money by going short and holding my position too long, and I would have certainly entered my long trade much too late.

Using the tick chart on the right, I was able to exit my short trade at the bottom of the trough as shown (note that, as usual, the Klinger Volume indicator gave me advance notice of the change), and prepare to go long only seconds later. This change in market sentiment occurred literally within a one-minute time period. This increased my profits and gave me the opportunity to respond to almost instantaneous shifts in market sentiment from bearish to bullish! Only the tick chart permits me to accomplish this!

Cliche: Gold glitters at another new high

It seems almost cliche by now to say that gold has reached another new all-time high price, but its true. Gold futures reached $916.60 per ounce just minutes ago.

Cotton joins agriculture bulls, while crude drops

Cotton prices are also reaching record highs. Since cotton is now competing for land with soybeans and corn, cotton futures prices are also reaching fresh 4-year highs along with other agricultural commodities. Agricultural commodities prices tend to be well supported during recessionary times, since people must still continue to purchase food and other basic staples. Here is the article on

Cotton jumps to almost four-year high

On the other hand, crude oil prices have been dropping in recent days, due mostly to concerns that demand may fall in a recession. Comments overnight by the Saudis that they have greater supply than previously thought, even though they refuse to provide it to world markets, has also helped to drive prices lower.

PPI: Highest annual inflation in 26 years!

U.S. government data released this morning showed annual Producer Price Index, the government's measurement of wholesale inflation, increased 6.3%, the highest since 1981! Click on the graphic at right, which is linked to the news report on Now that's inflation to be concerned about, despite the denials of Mr. Bernanke in his speech last Friday. Where is Volcker when we need him?

In addition, retail sales for the year were up a meager 4.2%, the slowest in 5 years. December monthly retail sales were down .4%, while economists had anticipated an increase. Since consumer spending, reflected in the retails sales figure, accounts for 2/3 of GDP, this disappointing report sent stock index futures southward. Including disappointing earnings reports from Merrill Lynch and Citigroup, which included another cash infusion from various sovereign wealth funds, the combination has caused stocks to sell off in the futures markets. Steve Leisman, chief economic analyst for CNBC, called it a "perfect storm" of bad news for the day.

Monday, January 14, 2008

Proof: Weak Dollar Does Not Improve Trade Deficit!

I highly recommend reading the following newsletter written by John Mauldin, who for the year 2007, was ranked second only to Warren Buffett as the best investment adviser. The attached chart is from his weekly newsletter, and proves that a weak US Dollar does not improve the trade deficit. If you would like to know the real cause, clink on the chart above, or read his newsletter here:

What Are They Thinking?

Read the link to the above newsletter. It will open your eyes to a few things on tax policy. It may even scare you. It did that for me! Great article, John! Great newsletter, too!

Corn, wheat reach lock limit prices for 2nd day!

Soybeans was up nearly 43 cents today, and has since reversed back to the settlement price on Friday.

Wheat and corn both touched their lock limit prices, and have since sold off somewhat. This is what I expected as a consequence of the conditions I elucidated in my last posting. This reversal and sell-off is more emblematic of a healthy market, and it relieves some of my anxiety.

One of the Signs of a Market Top or Bottom

Oftentimes, markets will experience exponential price expansion on high volume at the apex of a bull run. The fact that prices have retraced somewhat today, following such extreme prices that were reached Friday and earlier today, is good for the markets and will make for a healthier and more sustained continuation of the bullish trend in grains. This phenomena is healthy, I believe, because it will tend to wash out extreme and unreasonable speculation so that the bullish trend may continue.

The upper chart shown below is today's corn, and the lower one is wheat. Both charts were captured about mid-session before the later retracements, so the retracements are not depicted in these charts.

Hot Commodities: Prices Go Parabolic!

Gold, grains, and even crude oil prices overnight are rising rapidly. Commodities prices are accelerating skyward! They are changing from red hot... to white hot!

The headline in the graphic above is from an article from the Washington Post, and you can read it by clicking on the graphic, which I have linked to the article at the Post.

Is there anything that isn't rising in price? Yes! The U.S. Dollar is "being slammed today," in the words of CNBC futures reporter Rick Santelli. And as the USD continues to move down, commodities prices will continue to move higher, creating inflation.

Statistical Analysis + Technical Analysis = Bollinger Bands

I must confess, however, that I am a little anxious about this. Usually, when prices rise so rapidly in such a short period, sharp corrections are likely. Many commodities appear somewhat overbought to me on a temporary basis. I would expect that prices may correct or consolidate before another rise. I could be wrong, but historically and statistically, when prices move beyond two standard deviations of the bell curve from the mean (meaning outside the Bollinger Bands), a correction or consolidation increases in statistical probability.

When prices move outside three standard deviations from the mean, as has occurred in recent days with some of the most popular commodities, then the likelihood of a correction increases. In the case of three standard deviations, the statistical probability of a sharp correction becomes much more likely than a simple consolidation. I have no idea how much longer these parabolic prices increases will continue, but the longer they do, the more likely that a sharp pull-back will occur to return prices to within the statistical probability typical for the financial markets.

From a statistical standpoint, when prices go parabolic in their rise, it is highly probable that prices will correct or go stagnant for a period. When prices move outside the Bollinger Bands for an extended period, then prices are subject to sharp corrections or consolidation until the market can absorb new price levels and adjust to the higher levels.

Psychology of Market Madness and Manias

Part of the reason for this may be psychological. When prices move so far outside the accepted norm, then traders begin to think that they are unreasonable and overbought. They may then begin to sell them, or if they are overextended, they may be forced to cover those positions by selling as their positions begin to take a loss. I like to study mass market psychology and historical manias. Perhaps the classic book on the subject is "Extraordinary Popular Delusions and the Madness of Crowds" by Charles MacKay. Another good one, but less known, is "Confusion de Confusiones" (English translation) by Joseph de la Vega. Understanding these "delusions" and "confusions" is wisely always in the back of the minds of good traders. Using these psychological undercurrents against other traders, and understanding why they occur, gives traders one additional edge against the markets in trading. If you, dear reader, know of additional books on the subject of market psychology, and would like to recommend one, please contact me.