And the Commodities March Continues

I also sent this chart to a friend with the following message:

Also noteworthy: This may seem boring. If so, ignore it! On the weekly chart (left), note that the Bollinger Bands are beginning to WIDEN again (see the purple lower band). That is indicative of ACCELERATING momentum on the higher time frame! And note on the daily chart (right) that the BBand on the bottom is moving up FASTER! With BBands, people tend to look only at the band nearest prices/candles, but in actuality, the more important thing is to pay attention to the behavior of the band OPPOSITE where prices are. It's shape is even more meaningful.

The BBand pattern on the right chart (daily) is one that is called "parallels" because the bands tend to move "parallel" to each other over an extended period. It is the most profitable kind because it denotes a long, steady, but gradual trend. When prices move too far outside the band in a single session, they are like an overstretched rubber band that has a tendency to snap back in a corrective move before proceeding even higher. When prices move too far, too fast, they tend to form a different pattern, ironically called a "bubble". It has no relation to what we normally refer to as economic "bubbles". Bubble BBand patterns tend to burn out quickly and are profitable, but not nearly as much as parallels. A series of bubbles on a lower time frame often appear as parallels on a higher time frame.

Since BBands are based upon statistics (the purple bands represent 2 standard deviations), the further outside the bands prices go, the more likely we are to see a contraction because the market is overbought/oversold, at least temporarily, until the market can "catch up", take a breather, and the crowd mentality can absorb the new, more extreme prices. Behavioral economics! I refer to this as the "rubber band" effect. It would be interesting to add a 3 standard deviation Boll Band to see if today's activity reached that level. I hope that's not too verbose!

If this isn't too boring, and you are interested in some very detailed tech analysis reading, I translated a book from French 4 years ago on a methodology called "Dynamic Technical Analysis" (as opposed to "static" Tech Analysis used by most traders) by Philippe Cahen, the former VP of Tech Analysis at Credit Lyonnais. I could perhaps put the doc on a file sharing website where you could download it. It is VERY detailed -- about 200 pages to teach a single trading methodology. It is also translated from French, so the language is, at times, somewhat convoluted. I've only shared it with a handful of other people, and most of those found it to be too complex to use. Even I have made alterations in my own trading.

The Bear Market Is Back

Stocks today have slid back into bear market territory, with the Dow now down 20% from its highs last year. The Dow is now down more than 300 points today! With only positive news today in the economic data front, including a further slide in the price of crude oil and other commodities, this is a significant development. Many are viewing the slide in crude oil to be a bearish indicator because crude oil would only slide if the economy were in dire straights.

The daily chart above shows a Bollinger Band breakout of the lower band, after nearly two months of trading dead flat. If the index closes below the band today, and tomorrow continues to move even lower than today's low, a new downtrend is confirmed. However, I also expect to see an attempt to rally back to approximately the 8-period Exponential Moving Average before another sell-off. Some shorts will get shaken out of the market when this happens. I will probably use it as an opportunity to improve my position to improve my price before the selling.

If, on the other hand, the jobs report is better than expected, we may expect a rally that could last for days. Typically, if a Bollinger Band breakout occurs, and prices then rebound back within the bands, prices will often rally back toward the opposite Bollinger Band, often touching the opposing band. This would represent about a 500-point rally for the Dow, although it would not likely occur on a single day. Personally, I don't see this as a high probability scenario.

I also wonder if some of today's sell-off is a way for many traders to lighten up their positions for a possible bad number from tomorrow's payroll report. Obviously, the risk is to the downside tomorrow. Everyone is expecting a slide in unemployment of approximately 75,000. If the number is more than 75,000, perhaps even more than 100,000, then the market will be hit with a shock and could sell off even more. Many traders, who are otherwise bullish and have seen a possible bottom, might possibly be removing their bullish positions in anticipation of the possibility of a bearish jobs report tomorrow. We'll see when the monthly jobs report is released tomorrow morning by the Bureau of Labor Statistics. It will undoubtedly be an exciting day.

Stocks: That Incredible Sinking Feeling

Stocks continue to sink even lower! The Dow is now down over 300 points in the past two days. More manic markets. The daily chart, below, still shows stocks in consolidation, because prices still haven't closed outside the upper Bollinger Band. However, we should also note the higher lows (but not significant higher highs). A MACD bullish convergence and the Klinger Volume indicator both suggest a breakout is more likely to occur to the upside.

Manic Markets

So far this week, the Dow has had three days of triple-digit up and down days. The market has moved up 300 and 200 points, and down 200 points. Last week, there were two days that exceeded 200 points up, and two days that exceeded 200 points down. If this doesn't make for a manic market, I don't know what does.

Dynamic Technical Analysis and a Setup for a Breakout

Over the past month, the Dow has been trading within the Bollinger Bands and hasn't breached them and closed outside them. This is considered to be a prime set-up for a Cahen breakout based upon the Dynamic Technical Analysis trading methodology. It also suggests a period of minimal volatility on the longer time frame, despite the large numbers of triple digit days. The Bollinger Squeeze indicator also shows the small red dots that indicate that volatility is too low to trade on this time frame. Long-term trades at this point would be very risky and imprudent. When I trade stocks, I will only day trade them for now.

The longer we must wait for that breakout to occur, the more forceful that breakout will be when it occurs. In this daily chart for the Dow, we can clearly see that the Dow has been contained within a trading range defined by the Bollinger Bands since July 16th.

Direction of Breakout

While the breakout may occur in either direction, up or down, the Klinger Volume indicator suggests a breakout to the upside -- for the moment. Volume is building for the stock index futures to move higher.

The Bollinger Squeeze indicator seems to suggest a bearish breakout, while the MACD indicator also suggests a bullish breakout. Note also that the number of bullish candles (green ones) over these past few weeks outnumber the bearish (red) ones by a ratio of nearly two to one (2:1), especially this week. That also suggests a greater likelihood of a bullish breakout. Furthermore, the lows have edged progressively higher, while the highs have remained about the same, which seems a somewhat bullish omen. And most of the trading has been done above the Bollinger Moving Average (20 period SMA). As the older candles age out of the Moving Average, it will begin to move higher, unless prices drop below the MA and take the average lower within the next few days. This might also be considered to be bullish because the moving average tends to serve as support.

Bullish Stock Market Bias

I've mentioned prevously that there always seems to be a bullish bias for stock indexes. This is because the Fed and the U.S. government approve of stock price inflation. All the rescues, bail-outs, stimulus, credit supports, interest rates, monetary policies, PWGFM (President's Working Group for Financial Markets, also known as the Plunge Protection Team) interventions, and liquidity injections are intended to provide price support for Wall Street and create the impression of prosperity. Our government loves inflation, despite the jaw-boning to the contrary. Asset inflation creates the illusion of prosperity, and provides cover for elected officials to continue overspending, but unfortunately doesn't provide any sustainable benefits. Inflation is the policy!

Is it a Bear?

The bull trend in corn didn't last long. Now, it shows some of the markings of becoming a bear, riding a wave of weather that suggests increased corn yields, and thus, lower prices. The volume on the daily chart is still pointed higher, but prices are pointed lower. Conflict usually means consolidation and range trading. The left chart shows this evening's trading on the tick charts, and the right side shows what may be the emergence of a new bear in corn prices on the daily chart. Note also that the Bollinger Bands on the daily chart are more suggestive of a consolidation than a new bear trend, since volatility is falling rapidly.

Personally, I don't expect prices to decline too much. Commercials are already beginning to buy up corn at what they see as bargain prices. I would be surprised if the price of corn drops outside of the recent trading range. But who knows? Anything can happen!

Prices Continue Still Higher

I am only able to write about these trades because my trades are profitable and I am now managing them for maximum profit. If I were required to constantly monitor each tick, as I would if my trades were new and barely profitable, then I couldn't take the time to write about them.

In this chart, prices once again pushed firmly through the Bollinger Bands on the tick chart at right. Prices have continued to climb the moving average in a ladder-like fashion on the 3-minute chart (middle), and prices are approaching the Upper Bollinger Band on the 15-minute chart (left). I expect resistance at the Upper Bollinger Band, so I anticipate a pull-back soon. In fact, since prices are closing farther and farther below the Upper Bollinger Band on the 15-minute chart, and since the Klinger Volume indicator on the 15-minute chart is showing collapsing momentum, I wouldn't be surprised to see prices stagnate or perhaps even reverse. The Dow is currently up about 160 points for the day, and after such a sustained triple-digit rally, I don't expect a reversal -- at least not right away. Prices would be more likely to consolidate for a period of time before they would reverse and begin a new downward trend.

Dow Bounces

As explained in my last post, the Dow has found support at the EMA on the 15 minute chart (far left) and the Lower Bollinger Band on the 3 minute chart. It remains to be seen if this will result in a resumption of the Dow uptrend, or a temporary consolidation, most likely to be followed by a downturn. If the bulls can't push prices substantially higher (than the previous high), then a downtrend is likely to result. My gut tells me that prices will most likely consolidate for a time and then move lower, but I am trying to be unbiased in this regard. That way, I can be open to whatever market forces are trying to tell me. Exciting stuff!

Stocks Retrace From a Bull Run

Stock indexes have been moving steadily higher in recent weeks on a bull run by climbing the proverbial "wall of worry". However, the daily chart on the left here shows that stock prices haven't risen that much over the past two weeks, and the Bollinger Bands are suggesting a trading range and resistance at the 200 day moving average. Today, shown by the intra-day chart on the right, stocks are showing some selling volume.

Soybeans - Temp Top, Anything Can Happen

Soybeans have now formed a top, at least temporarily. Anything can happen now. Prices could sell off through more profit-taking, or we could see still another round of buying. The daily chart at the far left shows that soybean prices started a bounce from their lows about a week ago off the Lower Bollinger Band, but prices are now at the Upper Bollinger Band resistance point at a price of about $14 per bushel.

"Anything can happen." -- Mark Douglas

Dollar Sets Up for Bullish T1

In these two charts, we see that the Dollar has now moved briskly higher. Note in the 10 minute chart below that the rally has been brisk, beginning in the overnight session.

The daily chart (see below) also shows the emergence of a T1 set-up for a bull trend for the greenback, if today's candle closes outside the Bollinger Bands, as shown below. This candle is not yet complete, since the day session is on-going. It is also noteworthy in this chart that volume has been bullish for more than a month.

Grains Modestly Higher in Overnight Trading

Corn, soybeans, and wheat are all higher after light overnight trading. This is the overnight chart for wheat.

Soybean prices yesterday failed to break through the Upper Bollinger Band on the daily chart, a key resistance level. However, prices haven't closed below the Exponential Moving Average, either. It remains to be seen whether this will occur. This is a key inflection point for soybeans, but it will undoubtedly be driven by weather-related news.

Bollinger Bands Discussion

I have posted a rather lengthy discussion on my other blog regarding the use of Bollinger Bands. It started out as merely a chart, but I just kept writing until it became something more akin to an article rather than a brief posting. The link to that blog is on the right right of this page.

How Do You Trade This?

This is the 15 minute chart for soybeans today. Needless to say, it would be nearly impossible to trade profitably. Under circumstances like today, only short-term trades can be taken. This is why I trade only using tick charts. Days like we have seen in the past few weeks, in which we repeatedly reach lock limits, put me at somewhat of a disadvantage, so I prefer trading like this.

However, this chart is still valuable to me. Note the very potent resistance to prices moving higher through the upper daily price limit. How many times have prices approached this limit today and been repelled? About seven times!

Also, the Bollinger Bands are relatively flat, so they suggest to me that short-term, swing trading will be the most profitable, and that longer-term trading, even intra-day, will be an exercise in futility. One would have to use extremely wide stops, and accept considerable risk, to trade this market on longer-term charts today.

The underlying fundamentals of soybeans remain strong, so prices should remain well supported, and perhaps continue to move higher, but a balance between buying and selling activity appears to have been restored.

Much of this we owe to the renewed weakness of the US Dollar this week. The chart for the US Dollar Index futures below shows the short-lived rally of the Dollar and the new sell-off over the past few days (left chart - daily, middle - 2 hr, right - 30 minute). The Dollar is once again very close to its all-time lows at 71.400. The price at the time of this posting is 71.910. If the US Dollar Index does not break through the previous low, then a consolidation pattern and range trading may be in the offing for the near-term future. It appears that the Fed's attempts to underpin and support the Dollar have failed.

Wheat Trading Contracted, Difficult

The tick chart on the right showed volatility, but the 3 minute chart on the left suggests a contraction of the Bollinger Bands and poor volatility. When the Bollinger Bands are so contracted and tight on the 3 minute chart, trading activity on the tick chart tends to become erratic and difficult to trade. With corn and soybeans limit up, I am using the time today to read trading books. My favorite is Phantom's Gift. It always charges my trading batteries.

Soft Soybeans, Corn

The two charts shown at the top of this post are 3 minute charts of corn and soybeans. They are decidedly bearish today, but the bearishness lacks strong conviction. This is understandable, given the strong fundamentals for continued global demand for grains. However, note also the strong selling on the daily soybean chart at the bottom.

In these two charts, the Bollinger Bands are very important. The Bollinger Bands on the soybean chart are forming a "bubble" pattern, and the Bollinger Bands on the corn chart have formed a "parrallels" pattern, per Philippe Cahen in his book, Analyse Technique et Volatilite (yes, written in French). Both are profitable, but the bubble pattern tends to burn out more quickly and be less profitable, whereas the parralels pattern tends to extend itself over a longer period and be more profitable in the long run. Interestingly, a series of bubble patterns on a shorter-term chart will often form a parallels pattern on a longer-term chart.

Soybeans

Corn

Soybeans Daily Chart

The two primary indicators that I look for in deciding whether to go long or short are a crossover of the Exponential Moving Average, and a downturn in the Klinger Volume indicator that crosses above or below its moving average. Both of these conditions are showing right now on the daily soybean chart, shown here below. However, today hasn't closed yet, so until this occurs, a bearish trend in soybeans has not been confirmed. The bulls could easily step in and drive prices higher, perhaps even reaching a higher close today. Even if this happens, the bullish momentum on the longer-term charts is showing signs of waning, and exhaustion appears to be in the cards (see daily chart below). This has been a great bull run!

Most likely, at the end of a very strong trend, we are more likely to see a consolidation of prices at a fairly high level, rather than a complete reversal. Even if a consolidation occurs and a trading range sets in, this sets up my favorite trading conditions as a swing trader. Further, after a consolidation period of several weeks or even months, another break-out could occur and prices could move still higher.

Commodities Rebound Higher on Continued Dollar Weakness

The GSCI Commodities futures index has rebounded and moved even higher, but volume is dampened slightly from prior levels in this daily chart. If the volume indicator doesn't move above its yellow moving average line within a few days, this may be suggestive of a consolidation phase in commodity prices. If this is the case, shorter-term trades of a few days could become the order of the day. Another sign of weakening commodity price strength occurs when higher highs close within the Bollinger Bands, which indicates slowing momentum and falling volatility. Even still, some commodities (energy, for example) may continue to show extreme price strength. Note that for now, the Klinger Volume indicator has moved below its moving average.

Stocks Dead Flat for Weeks!

Look at the Bollinger Bands on this chart of the S&P 500 futures. They are absolutely flat, and have been for two weeks! The Bollinger Squeeze indicator in the bottom panel shows the red dots indicator of insufficient volatility to trade. This is the reason why many investors are sitting on the sidelines, waiting for stocks to get off dead center. Meanwhile, commodities continue to perform well.

Long USD, But With Tight Leash

I have been long the US Dollar Index since Feb 5th. It is trading above its 50-day moving average. If it doesn't close outside the Upper Bollinger Band today, I will close out my position with a small profit. I have a very tight stop on this one. I'm not going to hold it over the weekend unless it shows signs of additional strength.

One reason for the strength of the USD may be explained in this article:

Gold Traders See Through ECB's Smoke and Mirrors

USD Bouyant Following Trichet Inflation Talk

Apparently, fear that Europe will slip into recession based upon Trichet's dogged determination to fight inflation, is causing the Euro to plunge against the USD today. Meanwhile, the markets are showing confidence that the Fed's rate cuts will eventually bear fruit and bring the US out of its doldrums.

The US Dollar Index is up quite sharply the past three days (see the daily chart, on the left side), but particularly against the Euro. The light blue line on the left chart is the 50-day moving average. It has been a very long time since the USD has been above its 50-day MA. However, it is approaching the Upper Bollinger Band, which is usually a point of resistance from a statistical standpoint.
The right chart shown here is a 30 minute chart.

Wheat Moves Lower From Resistance

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.