Friday, April 11, 2008
This is the content of an email to a fellow trader last night:
I have been trading somewhat in the evenings for the past week. Here are a few observations that I have concerning trading during the evening in my time zone (MST).
- I only trade until about 9 pm MST. After that, many traders on the East Coast have gone to bed. Liquidity dries up and activity drops off. It can become quite unreliable and high risk after that.
- The only trading instruments that show sufficient liquidity and tight enough spreads to trade in the evening are the 10-year treasuries, the S&P 500, Corn, (sometimes) soybeans, the Euro, the Aussie Dollar, and the Yen. The Yen and Aussie have active business days during our evening hours (
Asia), so there is strong currency activity and good spreads to trade them. I always check soybeans before placing a trade during the evening to make sure that the spread is no more than 2 ticks. NO MORE! Otherwise, liquidity is poor and I won’t place a trade. Tonight, soybean trading was active and the spread was only 1 tick!
- I only trade the currency FUTURES, not Forex. Futures have tighter spreads than Forex at all hours of the day. The CME miraculously maintains tight spreads for currencies at all hours. Forex brokers make their money by widening the spreads. TS and CME make their money from charging a flat fee of only about $5-6 per round trip trade. If the spread is only 1 tick, you can break even at just 1 tick!
- I watch closely both the 3 minute and tick charts. I monitor very closely both of these charts side by side. Whichever one shows less market noise and looks cleaner, that’s the one I follow.
- I pay close attention to the Klinger Volume indicator and the EMA. I use a setting of 8 periods for the EMA, NOT the default. For the Klinger Volume indicator, I do NOT use the default settings either. I use the following settings, which give a much more accurate reading of market sentiment than the defaults:
SmoothATR: 2 (any other setting causes delay, and ruins the leading aspect of this indicator)
Smooth: 1 (same as above)
- My entries and exits are when I get a close that crosses the EMA, and then the next candle following the one that crossed must also go at least one tick higher or lower than the high/low of the candle that crossed the EMA. The Klinger must also be moving in the same direction, and if prices have reversed from the previous trend, the Klinger indicator must cross over its MA also. If it is a reinforcement of an existing trend, then I only require the Klinger to be moving in the same direction and reasonably close to its MA (mine is yellow, but I don’t know if the Klinger MA – the trigger line – is yellow by default).
- If prices quickly cross the EMA BACK in the direction away from my position for a small loss, I assume that volatility has fallen and that volatility is too low to trade further. I then look for the conditions that Cahen lists in his book (6 periods of candles closing inside the BBands, flat BBands, T1, etc.) I usually won’t take another trade until the T1 conditions are met and volatility rises again.
- If I see a lot of market noise for one instrument, I just look at the others. Treasuries are extremely liquid at all hours, but unfortunately, they are quite sedate in evening trading until the Europeans wake up and start trading.
- Trading in
Europepicks up and is extremely active and profitable at about 2 am MST. I think that is 3 am your time, but I’m not sure. Just in case you can’t sleep sometime. :)
The nice thing about evening trading is that it is much more leisurely, and you can take more time to be deliberate. A trade that might take 2-5 minutes during the day might take 20-40 in the evening.
Stay informed of your margin requirements regularly on the RJ Obrien website. Lately, margins have been updated 2-3 times each week. 6 months ago, they would only change about once every six weeks. Never max out your margin account. During these days of credit crises, it is better to maintain some extra liquidity rather than run the risk of a margin call or have your broker liquidate your positions against your will. I am expecting Congress and/or the Fed to step in and impose all sorts of new regulations and possible demands that may put small speculators like us out of business. The complaints about speculators in the business are getting louder and louder in Congress’ ears. (see my James Madison quote below).
"I believe there are more instances of the abridgement of freedom of the
people by gradual and silent encroachments by those in power than by
violent and sudden usurpations. ... The means of defense against foreign
danger historically have become the instruments of tyranny at home."
Thursday, April 10, 2008
This chart shows an interesting phenomenon. Except for Fed interventions, stocks have generally ended flat to lower. After the Fed-induced rally of 400 points a few weeks ago, the last 8 consecutive trading sessions have ended nearly flat. Look at the blue box on this chart. It shows 8 consecutive doji candles for the past several days. the good news is that usually, when a doji doesn't lead to a reversal on the next candle, the existing trend is likely to continue. In this case, it is a hopeful sign for stock market bulls. The longer the pattern persists, however, the more likely is a reversal. Also interesting to note is that nearly all of the green (up) candles were days when the Fed intervened. But look what happened on the days following the green Fed intervention days! Ouch!
Needless to say, there is great indecision in the stock markets about the direction of the US economy.
By listening to the market and giving it what it wants, I can trade this! It is not easy! Anyone who tells you that it is easy, is a liar! They either have an agenda or want your money. But it can be done!
Financial Markets are Like the Seas of the Earth
This is one reason I don't try to predict market moves.
Trader's Bias Vs. Giving the Markets What They Want
"Anything can happen."
The Klinger Volume indicator, like the stochastic indicator, is extremely sensitive to subtle shifts in market sentiment and momentum. However, the stochastic is limited in its range, since it essentially goes flat once it moves above 80 (overbought) or below 20 (oversold). Thus, the stochastic indicator loses its effectiveness and utility in these areas. The Klinger+ATR indicator doesn't lose its effectiveness; it continues to function and serve as a leading indicator all the while.
On days like today where the market moves sideways, once volatility falls, a trader must stop trading until volatility rises again. Otherwise, a trader will give up gains by whittling his past earnings away slowly with small, losing trades that gradually destroy one's margin account. Remember Phantom's Rule #1! I consider this to be a correlary to Rule #1. Don't trade in a dead/sideways market!
Only soybeans continue to trade significantly higher for the day. Corn and wheat have both given up their overnight gains and are trading below yesterday's closing prices.
Sideways trading appears to be the norm this morning, with this wheat chart a good example. Trading like this can be done profitably (recall my river analogy), but not on time interval charts. The market moves back and forth much to quickly to be traded profitably on time intervals charts. On days like this, a trader must be willing to accept small trades, but many more of them.
And so does inflation!
Wednesday, April 9, 2008
This is a nice set of parallels this evening on soybeans. They don't get any more picture perfect that this one. It's obvious why they are called "parallels". Liquidity has been unusually good for evening trading. Funds have been adding long positions en masse.
Corn and wheat are now plunging back to earth, as speculators are selling their positions and returning the grain prices back to earth today. It's about time we get back to reality! Even still, the price of wheat is barely back to flat today. This should also bring soybean prices back below their lock limit price! Unbelievable trading today! Stay on your toes, because we're not finished yet!
Corn Daily Chart -- There is no exploding bubble here!
- Reversal higher on Klinger Volume indicator before prices reverse. Again, the Klinger indicator has shown its remarkable consistency as a leading indicator.
- Both the Bollinger Squeeze and stochastic indicators turn up almost simultaneously.
- The Hull Moving Average and Gaussian filter (which are both smoothed exponential moving averages) turn up together.
- The MACD turns up just as prices turn up.
- Lastly, the 7 and 23 period moving averages turn up.
Note the divergence of the Klinger Volume indicator at the first red arrow. This is the finest leading indicator that I have ever seen. It really is remarkable. Note that is also suggests a change in market sentiment and direction several candles before the light blue and magenta simple moving averages (7 and 23 period, as recommended by Cahne) in the same (lower) panel, represented by the 2nd red arrow. Moving Averages are, by nature, lagging indicators. They always turn following prices. It is their nature to be this way. This is why we also use the MACD, which also signaled a bearish divergence shortly following the Klinger indicator.
I suspect this one may be a short-term reversal, since the 3 minute chart shows that prices are slightly overbought. They are somewhat over-extended above the 3 minute EMA, and ripe for a short-term correction.
3 minute and tick charts
Daily chart - down for an entire month
Grains opened up for the morning session, after a fairly action session that also traded up overnight. However, all three major grains have shown a sharp correction downward since then. The USDA crop report this morning was fairly bullish for soybeans and corn. I expect a rebound at some point today.
Tuesday, April 8, 2008
In an article on Bloomberg today, former Fed Chairman Paul Volcker questioned the legal authority of the Bernanke Fed to take over Bear Stearns a few weeks ago. Here is the article:
Volcker Says Fed's Bear Loan Stretches Legal Power
Monday, April 7, 2008
From Farm Futures Magazine:
The World Food Bank indicates that 33 countries face social unrest due to tightening global food supplies, according to Bloomberg. Both rice and wheat stocks are at their lowest levels in decades, with some major sources of these commodities limiting exports to protect their domestic supplies. This hardly sounds like a scenario of declining commodity prices until global stocks are rebuilt. Rebuilding stocks requires favorable weather and sufficient investment in the commodities to provide an economic incentive to boost production; in other words, high prices.The CME has also begun the new process of determining settlement prices. This explains why today's settlement price is below the lowest trading price on May 08 wheat today.
Here is more about rice and other grain prices:
Rice Races to Record High
The USDA will also start issuing weekly crop progress reports this afternoon. This is likely to add to volatility in coming weeks, so trader must take this into account on Monday afternoons.
Also due out on Wednesday morning is a USDA stock report, which is closely watched by many traders, especially funds.
I'm convinced that short-term trading will prevail for the foreseeable future. I will probably liquidate all long-term trades and trade only short term until a new, stronger long-term trend emerges. I remain bullish long-term for agricultural commodities due to strong fundamentals.
From John Mauldin's weekend newsletter. I highly recommend it, especially since it's free!
Payrolls tumbled by 80,000 today, more than forecast and the third monthly decline, the Labor Department said today in Washington. The unemployment rate rose to 5.1%, the highest level since September 2005, from 4.8%. The household survey shows the number of unemployed people rose by 438,000. (That is not a typo!) In March, the number of persons unemployed because they lost jobs increased by 300,000 to 4.2 million. Over the past 12 months, the number of unemployed job losers has increased by 914,000.And of course, when you look into the numbers it is worse than the headlines implies.
Prediction: we will see 6% unemployment before the end of the year.
There were negative revisions totaling 67,000 job losses for the last two months, making those months even worse. This means that the Bureau of Labor Statistics (BLS) is clearly over-estimating the number of jobs in the first announcement. That is because they have to extrapolate based on recent past data. And as I continually point out, as the economy softens, they are going to continue to overestimate the number of jobs. It's one of the problems of using past performance to predict future results.
Job losses since December are now at 286,000 in the private sector and 232,000 overall, counting for growth in government. What was up? Health care (23,000) and bars and restaurants (23,000 also). Initial unemployment claims are up by almost 25% for the last four weeks over last year, and this week were over 400,000. Given the job losses, this is not surprising.
This month the BLS hypothecates 142,000 jobs being created in their birth/death model. You can guarantee this will be revised down. For instance, they assume the creation of 28,000 new construction jobs as the construction industry is imploding. Total construction spending has fallen for the last four months in a row. Somehow they estimate 6,000 new jobs in the finance industries. Does anyone really think we saw a rise in employment in mortgage and investment banks?
...the amount of new debt in relationship to GDP is rising. We borrowed in one form or another $5.70 for each $1 rise in GDP last year.
Debt in all forms rose $7.86 trillion for the previous 8 quarters to $48.8 trillion dollars. Nominal GDP was only $14.1 trillion. This is of course unsustainable. At some point, debt growth must slow dramatically. As the world deleverages, decreasing debt and the resultant slowing of consumer spending will become a head wind for GDP growth.
Leading the entire commodities complex higher, both gold and crude oil futures have risen markedly today.
Gold - over $933
Crude Oil - over $109
Oil prices are now within less than $1 of their all-time high price.
From the CME this morning:
The CME will change the way it calculates the settlement prices in grains and the soybean complex today. Nearby contracts will settle at the midpoint of the closing ranges, and deferred contracts will then settle based on spread relationships in the pits.
In some ways, this is a good sign, because equity markets have fully priced in a recession, and equities prices have been slowly edging higher as well. Funds are moving out of safe-have treasury investments and back into stocks, albeit on somewhat weak volume. Even bad news for the U.S. economy (investment bank refunding, poor jobs report) over the past week has caused stocks to rally. This is a good example of a case in which the market moves contrary to what would have been expected. It is also an example of the leading nature of stocks and the almost nutty, optimistic nature of equity markets to hope for -- even expect -- improvement soon.
Sunday, April 6, 2008
From Bloomberg this evening:
Rice Run Prompts Curbs to Rival Credit Market Seizure
Just when it sounds like the Fed has achieved a renewal of confidence and shored up the US Dollar, here is an interesting article published in Bloomberg today. The interesting thing about the article is how many people from some of the world's largest financial powerhouses are all in agreement that the US Dollar is in the cusp of another major decline. Apparently, futures traders agree, with bets against the Dollar doubling since January.
Dollar Bottom Proves Elusive as G-7 Meets, Bearish Bets Double
If this sentiment bears out, there is a very good chance of a renewal of the commodity bull.