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!

What Do the Indicators Suggest?

Look at this chart. What do the indicators suggest was about to happen prior to the red arrow? All the indicators were pointing to a downward move in prices. I have marked divergences of the Klinger and Bollinger Squeeze indicators. The MACD was also pointing toward lower prices. Ironically, however, prices on the highest time frame (not shown), or principal time frame, are pointing toward continued higher prices.

Stocks Still Stink! No Break-Out Yet!

Even following the bullish revelations about a potential bail-out or fix for some of the bond insurers last week, stock index futures continue to trade within an extremely tight range, according to the most recent charts. Note that the Bollinger Squeeze indicator has turned to red dots (blue rectangle), indicating that volatility is too low to trade on the daily charts. The Bollinger Bands themselves are contracting even more, and stock index prices are trading within a remarkably tight trading range. Neither the bulls nor the bears are prevailing in this battle yet.

Soybeans: Volatility Too Low to Trade

The Bollinger Squeeze indicator, shown as red dots in the blue box in the bottom panel, has fallen too low to trade further on the 3-minute chart. I will now wait until the red dots disappear on this chart, or until I see a trade that I have missed that would have been profitable, had I taken it, on the tick chart. This will be a hint to me that sufficient volatility has returned to the market to once again make additional profitable trades. The Klinger Volume indicator (also known as Klinger+ATR) still shows selling volume, but prices have thus far remained steadfastly above the closing price for yesterday. The bulls have valiantly and successfully defended yesterday's settlement price thus far.

Soybeans: Trades 5-11

Trade #8 was too tiny for the arc to be seen, and was a small loss of 4 ticks. Trade 11 is still active at this posting, but the Klinger indicator has turned down, so I have tightened my stop in anticipation of this trade being closed out. Trade 10 started off very shaky, but has become one of the most profitable of the day.

Trading Win/Loss Ratio

Thus far, 9 of my 11 trades have been profitable, and the ones that lost money cost me only 5 ticks and 4 ticks. Good day! Working these up and down movements in the markets is what swing traders are most effective at doing.

If the trade looks questionable, I consider other factors:

• What do other indicators tell me (for example, the Bollinger Squeeze, Moving Averages, and MACD)?
  
• What do the indicators in the higher time frames suggest?
  
• Is there important support or resistance at this point? In this case, prices had already found support at the same price point three times today, so I considered it to be a good risk to remain in the trade.
  
• How much profit have I made so far today? Am I willing to take a little more risk, or are my profits too sparse to risk losing them today?
• How good is volatility right now? If the past few trades have shown sufficient volatility to take reasonable profits from the market, then I consider volatility to be good.
  

Wheat trading over the past few days has been supported by poor volume, and liquidity has suffered somewhat. I will wait until volume and volatility improve again.

Grains: Melancholy Markets

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!

It's Ugly Out There!

It's very ugly out there. Trading is at a near stand-still. I am trading for 2-3 ticks each. It's very risky, and I don't recommend it.

Look at all those red dots on the Bollinger Squeeze indicator on the 3 min chart (see the second chart below). Dead!

Can't trade this, don't try

Want to lose money? Try to trade this! Even the tick chart is too erratic to trade profitably. The Bollinger Squeeze indicator, shown here, has turned to all red dots, which indicates that volatility is too low to place new trades.

Even the 3 min chart, shown below, has a trading range too tight to trade right now. Eventually, it will give way to greater volatility again.

Time to trade wheat, which shows better volatility today.

Trading dies down - I wait

Note in the blue rectangle that the Bollinger Squeeze indicator has manifested to me that trading volatility has fallen too low to trade. Even the tick chart has become erratic and risky to place new trades. I must now wait until volatility rises again.

I will look for trading opportunities in other financial instruments. Treasuries and gold are the best choices for me. At about 12:00 pm EST, it is typical for trading volumes to taper off and volatility to drop. This is true of grains, but is especially true of gold, since the European business day ends at 12:00 pm EST. This is fully expected, and activity will increase again about 1 hour before close of the session.

Time to take the dog out!

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.

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.

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.

Bollinger Squeeze: Grain trading goes flat

The Bollinger Squeeze Indicator

In the two charts (following in this post), I have placed a blue rectangle around an indicator called the Bollinger Squeeze. This indicator was originally developed by a Tradestation subscriber, and was called NickM Next Big Move. It looks like this:

The Bollinger Squeeze indicator uses a Keltner Channel and Bollinger Bands to find a period in which market volatility is too low to take positions, and to predict which direction the next break-out will most likely occur (although I personally don't think it works that well in predicting the direction of the next momentum move). When the Keltner Channel lines contract to within the Bollinger Bands, it indicates that volatility has declined.

If there is one weakness in this indicator, it is that it tends to lag slightly, but it is still very valuable. However, I have found that in alerting a trader to both falling volatility, and notifying a trader of rising volatility, it tends to lag slightly behind the fact. This is probably unavoidable.

The Bollinger Squeeze was later commercialized by Carl Senters (if I recall correctly his name), who has developed and sold the same indicator for profit. It is available free if you have and use Tradestation. Obviously, you must be a Tradestation subscriber to download and use the indicator from the Tradestation forums.

Grains and the Bollinger Squeeze

In both of these charts -- one for corn, and the other for soybeans -- we see minimal volatility in trading today. Even though corn had a slight downtrend, it was minor and expected after a rapid rise in corn prices over the past few trading sessions. Corn has been the grain most well-supported in prices recently compared to the other grains. A period of lower volatility and a minor pull-back was expected.

Wheat was relatively subdued today, but maintained sufficient volatility for profitable trading.

In these two charts, I've bracketed the Bollinger Squeeze indicator in a blue box. When the blue dots occur at the zero line in this indicator, volatility is sufficient to take new trades. However, when the green dot occurs, followed by the red dots, volatility is low and insufficient to take a new position in the market. I have bracketed this phenomenon in both of the charts in this post. It is extremely unusual for these red dots to continue for very long, as we see in these two charts.

The good news, however, is that periods of low volatility tend to create pent-up demand that builds tension in the market, so it is predictive of high volatility to follow. The longer this period of low volatility lasts, the stronger the demand build-up is, and the more forceful will be the break-out when it occurs. That means that good trading conditions will occur again eventually, and the longer the low volatility period lasts, the stronger will be the new break-out when it happens. Volatility is what creates trading opportunities for traders.

There is a tendency to take a break and leave the computer when this condition occurs. However, that would be a mistake. It is better to remain alert and watchful, because the break-out can occur quickly and without much advance notice. When it happens, traders who have been waiting on the sidelines will jump and and place positions quickly, and prices will move very rapidly. One must be waiting at the ready for this situation to occur, because volatile trading conditions are the bread and butter of professional traders.

It is noteworthy that others commodities prices were also relatively subdued today. After reaching new all-time historic highs overnight during the European business day, gold was relatively quiet during the trading session in the United States.

Lower daily close for soybeans

Soybeans closed at a new lower daily close today (Dec 3 2007), but just barely. More significantly, perhaps, is that prices spent the entire day below the previous day's close, only rising to nearly reach Friday's closing price just in the closing minutes of today's trading session. Not only that, but soybean prices also reached a new low price (for the day) that was lower than the past few days. Prices haven't been this low since Nov. 20th. Note also that prices are getting quite close to a crossover of the Bollinger Moving Average (a 20-period Simple Moving Average).

Note in the 2nd subgraph that selling activity continues, as soybeans are being distributed. This Klinger+ATR indicator is a wonderful leading indicator for when big money is selling, even before prices themselves reverse.

I included the other subgraphs in this picture because I wanted to show that the Hull Moving Average (2nd subgraph, blue and magenta) has turned negative.

In the third subgraph, note that the Bollinger Squeeze indicator has turned from bright green to dark green, indicating a loss of volatility and momentum. Likewise, the Gaussian indicator (green and red in the same 3rd subgraph) has also turned down.

In the bottom subgraph, the MACD has also turned down! This is all in the daily chart. This is rather strong signaling of more bearish soybean activity to follow.

However:
The weekly chart is still bullish, although the Bollinger Squeeze indicator has just turned from bright green to dark green. I have not posted the weekly chart.