S&P Futures Show Bearish Divergence

The Klinger Volume indicator is showing a bearish divergence on the daily chart. It is still not a certainty, since the indicator must turn down for a few more days to cross its moving average (shown in yellow). I also require the divergence to be confirmed by other indicators. However, this indicator appears to be demonstrating higher prices but with a lower high on the volume indicator. If the S&P futures close below the EMA and then continue lower the following day, the bearish trend will be confirmed.

Today's Grain Rally Feels Weak, Unconvincing

This chart shows the soybean futures intra-day just moments after today's close. After rallying more than 20 cents higher early in the session, soybeans closed only 7 cents higher. Needless to say, today's rally has largely fizzled. After this morning's rally at the open, soybean futures lost momentum fairly quickly, and had shown more and more weakness as the trading session progressed. After closing limit down 70 cents yesterday, closing only 7 cents higher today suggests continued weakness to my mind.

Corn gapped lower this morning, and continued to drop throughout the trading session. This is significant because corn and soybeans often tend to trade somewhat in lock step with each other, so when one or the other moves independently of the other, it is very noticeable. Wheat moved higher at the open, but like soybeans, slowly edged lower since. Wheat has now closed near the flatline for the day. This also suggests bearishness. I wouldn't be surprised if more selling/liquidations occur over the coming days, driving prices still lower. Of course, a weather event could change everything -- literally overnight! We will now be trading weather through mid-May 2009.
The daily chart (above) for soybeans shows how strong yesterday's limit down price thrusts were, but it also depicts visually how weak today's attempt at a rebound was. If, following a strong one-day move that crosses over the Exponential Moving Average (in this case, crossing below the EMA yesterday), prices attempt a rebound back toward the previous trend (in this case, soybeans had been on a solid uptrend throughout December and early January), but fails to cross back over (above) the Exponential Moving Average within the next few days, a confirmed new trend (in this case, a downtrend) is confirmed. The fact that the rebound did not cross back above the EMA into bullish territory, increases the probability of a confirmed downtrend. Once an EMA crossover occurs, I will only trade the direction of the new trend, in the hopes of entering the new trend at a fairly early stage to maximize my profit. Since today's rally appears to be faltering, by shorting grains today, I hope to take advantage of the early emergence of a new downtrend in grains, if it occurs. I will continue to place short-only trades as long as the closing price remains below the EMA, or until prices crawl back above the EMA and create a fresh uptrend.

A consolidation is obviously a possibility as well with these strong movements in price. It is possible that for several days, price may move erratically back and forth within a range. If a downtrend is not confirmed within a day or two, I will pull back and stop trading until a new trend asserts itself and is confirmed. If the Bollinger Squeeze indicator turns red (not shown), this is an indication of a consolidation pattern and tells me that I should stop trading that futures instrument and watch for a new trend to emerge.

Even though soybeans closed higher today, the daily chart clearly shows the weakness of today's higher close. Corn continued to drop significantly throughout the session, confirming a downtrend, and wheat, while rallying with soybeans early in the session, closed nearly flat, signifying potential further weakness ahead. Since corn futures have greater open interest than the other grains, its movements tend to carry more weight in my decisions. It's lower close today creates a bias in my mind for further downside potential.

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.

S&P Finds Support at 1 Hr EMA

I had been watching the 1 hour EMA for possible support. It is depicted on this 15-minute chart as the green line supporting prices on the left chart. Prices have begun to find support and push higher. I expect a short-term rebound at this point. If we see only a consolidation, then it will be very short-lived. However, the over-riding economic concerns are likely to eventually lead to lower stock market prices, either today or early next week.

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!

Shorted Dow

My last post mentioned conditions under which I would short the Dow, which have now manifested themselves. However, prices are close to the 15 minute EMA (left chart), so I am anticipating that prices will find support near here, at least temporarily. If prices move through that EMA and remain below the previous highs, I will plan to go short again. This conflict will probably result in consolidation in this range until this conflict is resolved by either the bulls or the bears. This is hinted at on the tick chart (right) as well as potential dynamic support by the Bollinger Bands on the 3 minute chart (middle). This would be a likely place for prices to rebound higher to resume today's uptrend, or to merely consolidate.

From my experience, however, one never knows which side will win out. With all the worry troubling the stock markets these last few days, there has been a somewhat bearish sentiment lately, as manifested on the daily charts (not shown). However, with Bernanke's statements yesterday and bullish economic data today, the bulls might very well win out. I must be prepared for anything!

I have noticed that stock index traders tend to have very short memories. Morose sentiment one day often gives way to ecstatic sentiment the next day, resulting in manic-depressive movements in the stock indexes. And that's fine with me, because it provides the momentum, liquidity, and volatility needed for profits in the futures markets.

I will continue to buy and sell based upon Phantom's Rule #1 and Rule #2, using my entry, add-on, and exit points, as long as these charts continue to trade with smooth, clean trading conditions. I suppose that only a trader could view this apparent chaos as a thing of artistic beauty! But to me, that's what they are!

Bulls Battle Back Again

The bulls battled back a second time to end the day well off the session lows. This time, however, the buying is more forceful and convincing, compared with the erratic buying that occurred previously. Still, the day has ended below the EMA, so if tomorrow's session continues lower still, a short position on the daily chart would be confirmed for me.

Soybeans Condolidation

Note in this chart that soybean prices found resistance today at the Exponential Moving Average on the daily chart (left). The chart on the right is the 15-minute chart. The same occurred on Tuesday. Also notable is the continued strong selling as reflected in the Klinger Volume indicator on both the daily and intra-day chars. Even with two green candles indicating up days, the volume indicator continues to signal more selling. This is particularly important on the daily chart, because it suggests selling by large funds and commercials. Still, the pattern, by itself, on this chart seems to indicate that a consolidation is forming for now. As the EMA moves lower, there will added pressure for prices to move lower. On the intra-day charts, trading has improved, but not markedly. These last few days have been difficult, but still profitable.

Short Again for Wheat

This chart shows why the grains markets keep me so busy trading. I don't know why, but prices frequently reverse at the prior day's settlement price (light blue dotted line), as shown in this chart. Note once again that the Klinger Volume indicator has turned, but had not yet crossed below its moving average. It had lost momentum, however. This is an example of when the Klinger Volume indicator at times doesn't demonstrate its leading nature.

Keep in mind also that on the 15 minute chart, the EMA will continue to provide support and upward price pressure.

Wheat Long Again

Note in this chart that, as usual, the Klinger Volume indicator, as a leading indicator, turned up in its predictive role. I entered just as price crossed the EMA and the Bollinger Moving Average, which also turned up shortly thereafter. Prices also bounced upward off the EMA of the 15-minute chart at this same point.

Chart Triptych

I use a chart triptych as recommended by one of my teacher/mentors. This one is recommended by Philippe Cahen in his fantastic book on his copyrighted trading methodology called, "Analyse Technique et Volatilite". Yes, it is written in French. I spent 8 weeks translating it into English so I could use it. He wrote an earlier version in English titled, "Dynamic Technical Analysis".

I use 3 time horizons on my screen (this constitute the triptych) at all times to give me context. I also check the daily charts each day, and often I look at other time intervals as well.

One of the reasons that I like this method of trading so much is that it truly is dynamic. Instead of using static settings and fixed lines, this method takes into account the dynamic, constantly-changing nature of the financial markets, including for dynamic support and resistance using Bollinger Bands and EMAs.

Another reason that I prefer this method is that it is entirely visual in nature. I must be very visually-oriented. I have modified and added other indicators to Cahen's method, but I have kept the triptych, which I consider to be a necessity.

Indicator settings

Another post from Tradestation forums dated Nov 19th, 2007

Here are the indicators I use in my trading. I also use a 3 minute and 15 minute chart. On the 3 minute chart, I have also added the 15 minute EMA, and on the 15 minute, I have also added the 60 minute EMA. I added them so I can see the potential support and resistance that they provide.

One of the nice features I've noticed about soybeans is how smoothly the market moves, with relatively little market noise compared with some other instruments. I also like that there is often a very active trading market during the evening hours in my time zone. This chart, for example, is for TONIGHT. Note how active the market is this evening. This is NOT atypical.

Indicators usage explanation

This was a post I placed in the Tradestation forums on Nov 19th. It explains how I use some of my indicators.

Here is the 15 minute chart for soybeans today, beginning at the dotted line from 7:30 pm EST last night. Soybean futures are my favorite instrument to trade because it has more volatility than wheat or corn, but moves slowly enough for me to be able to get in an out with good executions, combined with strong liquidity (soybeans are the USA's second largest grain crop - corn is #1). I include this chart to show how nicely the 8 period EMA works as dynamic support and resistance. Don't ask me why, but it does. (In his Encyclopedia of indicators, Rober Colby says that EMAs tested better than any other indicator he has tested; he also mentions an interesting phenomenon of EMAs is that they change direction ONLY on the candle in which prices close on the opposite side of the EMA. Note this phenomemon occurs in the price graph of my chart, changing between red and blue in the 30 tick chart of my prior post. It makes it easy to see.)

Note also that the Klinger + ATR indicator tonight is suggesting a bullish reversal is very likely, especially since soybeans are in a long-term bullish trend since Oct 9. There appears to be strong buying activity, and I will wait until at least one of my MA's (Hull, Guassian, or EMA) before I buy. This leading signal is what makes Klinger so useful, I believe.

The pale yellow horizontal dashed line is the settlement price from the prior days' trading. With grains, there are daily lock limits, and I mark those with solid yellow lines. (Soybeans rarely reaches the lock limit price of 50 cents, but wheat and corn quite frequently hit their lock limits of 30 cents and 20 cents respectivly.) I mark them every day, however, so I don't take a trade right before lock limit is reached. I also change the color daily, so I don't mistake a prior days' line that was above or below my visible range on the chart for today's lock limits.

I also use MA's to help me gauge when the reversal of trend is occuring, and the MACD to confirm that one is under way (bottom subgraph). Klinger is a wonderful leading indicator of a change in accumulation/distribution, but I use the MA's to help me time when this is happening. The Hull MA is located in the 2nd subgraph (blue for UP, magenta for DOWN), and the Gaussian is located in the 3rd subgraph (green for UP, red for DOWN).

I also use the Bollinger Squeeze indicator to help me know when a loss of momentum is under way and continued add-ons or new trades would be inadvisable.

I have tried my hand at trying to program a strategy, but after spending months at it, I finally realized my programming skills were simply not up to the task. Still, this method is working well for me. Just don't ask if I have automated it; the answer is "no".

Anyway, this is my contribution thus far, in the spirit of sharing. Any suggestions or additional ideas (or questions) are welcome. However, since I am trading every day, I don't spend much time in these forums. Regards to all my fellow traders.

One last observation - quite important and interesting, too:
Note in the second and third subgraphs that when the MAs cross below the other indicators, this moment quite consistently represents the nadir/apex of the trade. It is usually the best point to exit. I like BOTH the Hull MA and Guassian to cross over the other indicators (Klinger in the 2nd subgraph, and slow stochastic in the 3rd subgraph) at nearly the same time, which they do almost perfectly in this example. They often cross on precisely the same candle. If they don't cross nearly simultaneously, I question the signal. You can see this phenomenon in both of the charts I've posted tonight (the 30 tick chart, and the 15 min. chart). I believe this occurs with such consistency, at least partly because stochastic and Klinger (with my settings) are very sensitive and leading in nature, while MAs are lagging by nature.

Daily Soybeans losing momentum, volatility

I am posting here a daily chart for soybeans. It is showing all the signs of an imminent reversal. Note in the last candle, prices have crossed convincingly through the EMA. Prices tried, but failed, yesterday. I have programmed my EMA so that it changes from blue to red when this occurs. (By the way, I use Tradestation, both for my charts and as my futures broker).

At the same time, notice in the 2nd panel that the Klinger Volume indicator has already turned down days before, and has now also crossed below its yellow trigger line, which is also moving lower.

On the same candle, BOTH the Hull Moving Average (magenta and blue in the 2nd panel), and the Gaussian filter (not pictured in this graphic, but typically shown as green and red in the 3rd panel of my other chart examples), also turned DOWN on the same candle. Thus, all 3 moving averages turned down at the same time. I should also note that the slow stochastic and MACD have also turned down, as has Open Interest.

Will soybeans turn down in price? Only time will tell, but this is a good hint of lower prices to come, or at the very least, fading upside energy and momentum. If I had to guess, I would bet that prices will rise again until the longer Bollinger Moving Average in the top panel draws closer to prices. A sideways movement may be more likely until more long-term traders realize that the big soybean move of the past year is finally coming to an end. I'll be ready, however, for a new move up and amplification of the bullish trend, as has happened in the past. Be ready for anything the market gives you.

One last thing: Since hedge fund traders and hedgers (not the same thing) often use them, I have added the 50-day (light blue) and 200-day (magenta) Simple Moving Averages to my daily chart. Since so many people consider them to be important, I wanted to be able to see them. They represent important potential support.

Dream soybeans trade

This is the kind of trade that we traders live for. It was both profitable and quick, lasting only a little over 20 minutes. I like trading the last hour of the grains trading session because it intensifies and moves smoothly.

I like to enter when prices cross the Exponential moving average, and the Klinger Volume indicator (2nd panel, red/green line crossing the yellow MA) cross at almost the same time. It is an added plus if prices have recently crossed the Bollinger Moving Average (yellow dashed line), and prices are coming off of recent highs, which they also did in this case.

I decided to exit at the end when BOTH the Klinger indicator and the MACD showed a bullish divergence at the same time, as indicated by the green lines in the 2nd and 4th panels. I have marked them with green arrows.

I probably would have gone long at the point where I exited part of my trade, except that after prices cross over the EMA, I require a confirmation by continued price movement in the new direction, which didn't occur. If there is no follow-through, then I will hold my position, or perhaps reinforce my position by adding to it. I am reluctant to reverse my position immediately following a sustained move, as occurred in this situation. Usually, after a significant move in one direction, prices will take awhile to stabilize, giving me more than one opportunity to exit. I like to see a 2nd attempt to move up, with a higher low than the previous one, before I change directions.

In this case, I wish I had added to my position, but I didn't because the Bollinger Bands were contracting rapidly and the stochastic was oversold.