Friday, February 1, 2008
Gold prices have backed off significantly since the poor jobs report from the U.S. this morning. The U.S. economy lost jobs during January for the first time in 4 years! Weak economy equals weak demand?
Thursday, January 31, 2008
Often, the grains and oilseeds will move somewhat in sympathy with each other, with price in corn moving up as soybeans does, or with wheat moving down as corn does. Not today! The various grains are showing a stroke of true independence today, with corn and wheat moving higher, and soybeans moving lower for the the day.
Sometimes, if I'm unsure which direction a break-out will occur with soybeans, I will look at what is happening on the corn charts, because the two often move in sympathy with each other. Today, however, they are moving quite independently from each other.
Wheat has touched trend line support at around 907, and has rebounded resolutely higher. Note that the 50-day moving average is also providing on-going support for wheat prices. Both the trend line and the moving average are depicted on this chart in light blue. If this continues, we should see a break-out, either up or down, within the next few days or weeks.
Wednesday, January 30, 2008
It must be troubling to the Fed to see stock markets rally more than 150 points on the Dow following their rate announcement, and then sell off to close down for the day. The dotted white line is the closing price for the S&P futures yesterday. Perhaps if the stock market doesn't rally with rate cuts, the Fed will take some solace in knowing that commodity prices -- and inflation -- will!
Why would the price of crude oil spike higher when demand for petroleum products has fallen?
Today's Fed rate cuts have undercut the value of the US Dollar, sending it plunging lower. Thus, crude oil prices must rise to compensate. These two charts, showing the spike in the price of oil, and the off-setting plunge in the value of the USD, occurred simultaneously with the Fed rate announcement today.
Following the Fed rate announcement, within minutes, the US Dollar Index futures have spiked downward to within just 1 tick of an all-time low (see chart of US Dollar Index futures at right). If it continues -- and there is no reason to think it won't -- commodity prices will likely surge again, just as oil and gold have in the minutes following the announcement.
One Answer: Many are fleeing to gold.
Confidence in the US Dollar, and concomitant confidence in US Treasuries, may be reaching its limits.
The daily chart shown here of the 10 year US Treasury futures is showing net liquidations, both in prices and volume. The Klinger Volume indicator in the subgraph has turned red, indicating a net selling of treasury futures. This indicator is a very fine leading indicator, and almost always changes direction before a new trend begins.
More and more investors are buying gold (next chart), leading it to ever-higher prices on the back of greater demand. Note again that in this case, the Klinger Volume indicator is showing strong accumulative buying, as evidenced by the green line in the subgraph.
So who is buying treasuries, to keep interest rates so low? Read the articles below for the answer.
Here are some must-read articles on the interaction between the Fed, bonds, inflation, money supply, and interest rates. The term "bond vigilantes" was coined in an article by Dow Jones.
Bond Vigilantes Strike Back
Central Banker's Worst Nightmare - the Gold and Bond Vigilantes by Gary Dorsch, highly recommended. The sample chart above is from this great article.
Bond Vigilantes Pounce on Prices
US Economy Sliding Toward Stagflation, Bond Vigilantes Hooked on Gold
Bond Vigilantes Hooked on Gold
Gold Soars Into Orbit
As I had suggested a few days ago, the Upper Bollinger Band has provided dynamic resistance against higher prices for wheat, and it is moving lower for the second day. Since Bollinger Bands are based upon the concept of statistical deviation from a mean, it stands to reason that market forces were feeling that wheat was reaching prices that were too high, especially after reaching lock limit levels two days in a row. Bollinger Bands also represent one form of dynamic support and resistance, as do Exponential Moving Averages, Parabolic SAR, and others. At these dynamic levels, prices meet support and resistance, and therefore have a tendency to reverse. I avoid taking new positions as prices approach these markers.
Bloomberg this morning said that wheat traders thought prices were somewhat overbought from a rapid rise late last week, and have been liquidating, taking profits, and/or selling short as a result. Note here the daily chart (top chart, above), showing the resistance at the upper Bollinger Band, and the short-term charts (lower chart) showing today's sell-off in wheat.
In contrast, it is also noteworthy that in this daily chart (the upper one in this post), a series of higher lows and higher highs is evident (the light blue trend lines), so the beginnings of a new bull market in wheat may be emerging. It is still weak, but certainly worth watching.
A weaker US Dollar resulting from continued Fed rate cuts could perhaps be enough to increase international demand, create a break-out, and push wheat prices into a new, stronger uptrend. This could happen as soon as tomorrow, if the Fed continues its recent policy of aggressive interest rate cuts at the FOMC meeting this afternoon. However, since the grain markets close at the same hour as the Fed announcement, the impact on wheat prices won't impact the market until evening trading tonight. If it does affect wheat prices, no doubt that other grains and agricultural commodities prices will also experience renewed vigor.
Note from this chart that while the larger market remains somewhat erratic and indecisive (see 3 min chart on the left), the tick chart (right side and below) shows good movement that can yield strong profits by swing trading back and forth. These are good conditions for day trading. The past two days, I had begun to worry that market conditions and liquidity had been permanently altered that would make daily swing trading difficult.
I have mentioned previously in this blog that some of the grains have shown significant selling on my Klinger Volume indicator. Note in the lower panel of this chart how powerful and sustained this phenomenon has become by the red line, indicating a somewhat dramatic shift in sentiment. I always couple this indicator with others, primarily an Exponential Moving Average, that tells me when price momentum shifts. When the two combine, it will be time to sell for longer-term traders. This is also a prime opportunity for swing traders who ride the tides and waves of the market seas. This chart shows corn. Soybean prices on the daily chart has shown a similar volume-based decline, but have turned up again over the past week. Corn, on the other hand, shows continued weakening, as seen in this chart. It may be significant also that prices have failed to reach prior price highs from two weeks ago, as shown by what appears to be a lower high in the top portion of the chart.
Tuesday, January 29, 2008
As commodity prices have rise today, treasuries have sold off. The increased vigor of the U.S. economy, as demonstrated in today's data releases of consumer confidence and durable goods, have caused traders to sell treasuries in favor of other assets, including both equities and commodities.
What a strange market! After momentarily touching their lock limit price, wheat prices have plummeted back even below the settlement price from the previous day. This is a price range of nearly 50 cents within about 45 minutes! Very dramatic!
Wheat prices have now erased their early gains that reached lock limit, and have returned to the price level where they started the day session. This has created some excellent trading conditions while corn and soybeans have been somewhat lack-luster and erratic.
On the daily chart (not shown), wheat has also reached the resistance area of the upper Bollinger Band. Statistically, if wheat price continue upward, they will move outside the area of 2 standard deviations. The next few days will be critical for wheat prices, whether they continue upward and enter the area outside 2 standard deviations, or whether they return to within the bell curve and remain with a single standard deviation. If price continue moving higher, this would be an indicator of a new bull trend.
While it seems a bit cliche by now, gold has reached another new high overnight. Perhaps the broader story is that with monetary easing appearing to continue for some time, commodity prices are reinflating rapidly (see the second chart, a daily one of corn). Perhaps this is at least in part due to the better prospects for the U.S. economy, based upon improved data releases today of consumer confidence and durable goods orders, and the higher demand pressures that those improved conditions will create. Even crude oil has rebounded more than $5.00 per barrel from its most recent low prices.
Monday, January 28, 2008
Volume is still unusually low in the grains complex. However, there has once again begun to be sufficient volatility to place trades. While charts are still somewhat erratic, profitable trading can be achieved once again.
All of the grains markets today have been sullen and lifeless through the middle of the trading session. I hope that it will pick up again in the last hour of trading. Note the blue rectangle in the 3 min corn chart shows that volatility is too low to establish new trades, as manifested on the Bollinger Squeeze indicator by the red dots. Soybean and wheat charts are similar. It's a good thing that trading was better last night and for the first half hour of the session this morning!
And now, a consolidation has set in. After a series of various small, short trades for 3-5 cents each in profits, even the tick chart has now shown signs of consolidation. While 3-5 cents may not sound like much, each trade amounts to about $50 profits for each cent that prices move. A series of 6-8 trades can be highly profitable, if losses are kept small. He who loses least, wins the most (see Phantom's Rules, #1).
I will wait for the next break-out.
In some ways, the slower trading, with lower volume, that has marked today's trading so far is a blessing. It makes executions, and accuracy of trading, easier and more reliable. Instead of being forced to react very rapidly and with poor price executions, traders can be more precise in their trading. This results in less slippage and trading can be more reliable.
Soybeans trading has started the day without a lot of the type of volume that is typical. This may indicate that no strong price pressure exists due to demand or supply. It is also probably an indicator of the high probability of range trading, as traders alternate long and short positions due to lack of conviction.
Sunday, January 27, 2008
Trading this evening has been just as smooth as glass, although I have been somewhat disappointed that liquidity and spreads haven't been better. Look how smooth and easy this chart has been to trade. I couldn't ask for better trading conditions. It reminds me of when I was young, and we used to look for water skiing conditions on water that was smooth as glass. Tonight was like that!
I started a community group on the marketwatch.com website dedicated to agricultural commodities. I also started similar groups there regarding energies and gold. Here is the link to the ag group:
Feel free to join us there to discuss various aspects of grains and other ag commodities trading.