Broad Commodity Indexes Continue to Rise

Note, however, on the daily chart that volume is showing a decline and a divergence in the lower panel.

Corn, Grains Showing Weakness

Only corn so far has shown a divergence in volume. After failing to break through 575/bushel all week, the Klinger Volume indicator shows a bearish divergence. Beans and wheat are showing weakness, but no volume divergence -- yet! But all three grains closed lower today.

The divergence for oats was even more striking!

CCI Shows Early Signs of Divergence Also

This is still a little early also, but notice that a volume divergence is forming on the daily chart. Have commodities reached their zenith, or are they close to it? Stochastic (not shown) has also shown signs of being overbought, and the MACD is close to being overbought (also not shown), although it isn't there quite yet. MACD, however, is a notorious lagging indicator, while Klinger Volume (seen above) is the best leading indicator I am familiar with.
With Bernanke talking of more quantitative easing today, I find it hard to believe that commodities have topped out, but the signs certainly point at that possibility. Prices must now confirm this by moving lower in the next few days.

Silver Also Shows Volume Divergence

The price hasn't yet confirmed this divergence. It is still in an uptrend. But if gold reverses, silver may soon follow. The volume on both the four-hour (left) and daily (right) charts has turned bearish.

Gold Loses Steam

Note also in the daily chart, volume has been dropping for several days, and a divergence has formed (see lower panel). This looks like a top, at least temporarily. I may be a little premature on this because the price hasn't dropped below the EMA yet, but this was an interesting reaction following Bernanke's speech this morning. I will be watching for follow-through on Sunday evening into Monday.

Corn - New Lows, But Volume Turns Bullish

The volume indicator has turned higher. Time to start buying!

Crude Oil $5 Higher from Last Week

Crude oil has risen from a low of $58.32 to a price in excess of $63.50 today. Look at the Klinger Volume indicator!

Daily Stock Chart Shows More Selling Volume

The divergence has been confirmed, and selling is picking up steam on the daily chart also. Note the selling volume increasing on the Klinger Volume indicator. We are now struggling to find support at the 20-day Moving Average.

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.

S&P 500 Chart Shows Massive Liquidations

Despite higher highs lately, the volume indicators are suggesting a different story. Some very large market participants are heading for the exits in a hurry!

Gold Contracts $40 from Upper Trend Line

This daily chart for gold shows the contraction from the upper trend line today. Look at the blue circle above the green arrow at the top right. My previous post shows the magnitude of the pullback on the intraday charts. This one shows the contraction on the longer-term chart. The second panel also shows a bearish divergence on the volume indicator, and an overbought signal on the stochastic indicator.

Grains Regain Footing in Anticipation of Lower USDA Forecasts

Grain futures have begun to show signs of price recovery recently, after moving higher two of the past three days and crossing above the Exponential Moving Average today. If prices hold above this level, it will be a bullish sign. The Klinger Volume indicator, as shown in the lower panel of this chart, still appears bearish, however. Note that at the far right side, today's Klinger remains red despite grains having moved higher overnight. I will be watching closely to see what happens during the main trading session today.

Volume remains light for all futures during the Christmas Holiday period. This is typical for December. I don't expect volume levels to recover until January. I am always cautious during December's weak volume period because there is more market noise and greater erratic volatility than usual.

Here is a good Bloomberg article explaining the more bullish sentiment.

Consolidation and Holding

Frequently, prices will temporarily flatten out, as shown at the far right of this chart. This chart immediately follows the one in my last post. Anything can happen at this point. Prices could continue to climb still higher, or a reversal could ensue. After a sustained rally such as today, a sudden reversal is unlikely, unless some news event has just broken that reverses sentiment. The more sustained the rally, the more attention I will pay to higher time frames.

At this point, I will begin to look at the higher time frames for guidance, especially the Klinger Volume indicator, which is the best leading indicator I've seen. The 3-minute chart below shows waning volume and momentum.

The 15-minute chart below shows that we have reached resistance, but that resistance is weak. The 15-minute Klinger Volume indicator continues to show continued upward volume. However, the 15-minute Bollinger Bands show that momentum is also beginning to wane. I also consider on the higher time frames where prices are in relationship to the Bollinger Bands. If prices are close to the upper Bollinger Band, I anticipate that there will be a "rubber band" pull-back, since from a statistical standpoint, prices are temporarily overbought.

I will continue to hold, but if prices don't push higher through my Bollinger Bands on the tick chart, I will probably liquidate my trades fairly soon.

Proof That Anything Can Happen

One of the 5 fundamental truths (Mark Douglas) of trading the futures markets is that "anything can happen". Today's trading in the treasury futures is a poignant example of this principle. With the Fed's rescue of Fannie Mae and Freddie Mac, the treasury futures reversed between last Friday's close and today's trading. In fact, last night, the treasury futures continued to sell off, confirming the downtrend signaled last Friday. However, when the Fed intervenes into the financial markets, prices can reverse on a dime, as shown in this daily chart for the 10 year treasuries. Anyone who tries to tell me that they can trade without ever experiencing a loss or a reversal against their position, undoubtedly has a personal agenda, and knows that they are usually hedging the whole truth Surprises happen, and as a trader, I need to always be prepared for that possibility. Anything can happen!

One more thing: from my experience, when a large counter-trend event occurs like last Friday (that long red candle), even if the original trend reasserts itself, that new trend is typically shorter-lived than the original. Such a strong, albeit temporary, reversal usually is a sign that the counter-trend forces are gathering strength. Often, the volume trend indicators will show a marked reversal at that point, as shown in the lower panel on the Klinger Volume indicator in this chart. That green reversal candle today is more likely to be indicative of a consolidation than a reinforcement of the previous trend. Then again, anything can happen!

I always get a kick out of pundits and traders who talk like they can predict the future price activity of a stock or futures instrument. I don't try to predict or forecast. I just strive to respond to market indicators and price action, reacting to the daily and hourly price activity. I intentionally try to restrain myself from predicting or forecasting. Sorry, but I have no crystal ball, and don't believe those who claim to have one! In fact, as soon as I hear someone saying, "The stock market is going to do such-and-such between now and the end of the year", that person immediately loses credibility with me. Are such people ever truly kept accountable for such predictions? NO!

Have you ever wondered why psychics only try to tell people about things that can't be explicitly verified? They predict nebulous things like, "I see a man close to you with the letter "P" in his name", or "someone close to you died tragically"? Hey, we all know someone with the letter "p" in their name, and someone who died tragically! The last I checked, we all die, and many -- perhaps most -- of those deaths are somewhat sad -- ie., tragic! Why are people so gullible to believe that stuff. Why don't those psychics ever become billionaires by accurately predicting financial market moves? Answer: because they can't! They don't have any crystal balls, either!

I just do what the charts tell me to do! That's my edge! By keeping tight stops, I can exit quickly when I make a bad trade, and that's how I keep my head -- and money -- in the game long-term. Exiting quickly on a bad trade also keeps me from becoming emotionally attached to a losing trade. It's amazing how quickly my thinking and my emotions clear when I jump swiftly out of a bad trade. Emotions are the enemy of traders, and getting out of a bad trade with a small loss is the best therapy for them. Predicting the future, I have found, doesn't pay very well, and it leads me to make lots of very expensive mistakes.

Divergences Form, Prices Collapse

Look at the divergences that formed on these charts. They are depicted in these two charts as heavy red downward-sloping lines in the 2nd and 4th panels of both time frames shown here. The 2nd panel shows bearish divergences on the Klinger Volume indicator, and the 4th panel shows divergences on the MACD. Prices have subsequently collapsed on the Dow! Interestingly, however, while prices have collapsed on the S&P 500 Index and Dow futures, prices have only consolidated on the NASDAQ and S&P 400 Mid-Cap futures. The Dow tends to closely mirror the S&P 500, while the NASDAQ and S&P Mid-Cap also tend to mirror each other. Each of them tend to have distinctive characteristics of their own.

Tick Charts Have Different Values

If you examine the charts closely, readers will also see that I use different tick values on the tick charts for each of them. I do this, adjusting each one from time to time, until the charts become more orderly and smooth. Today, I am using 100 tick charts for the Dow, 50 tick charts for the S&P Mid-Cap, 150 tick charts for the NASDAQ, and 250 tick charts for the S&P 500. For some reason, the S&P 500 is the most difficult to find adjustments that result in smooth charts, even though it is by far the most liquid of the stock index futures. I suspect that this may be because the S&P 500 has more trading activity by amateurs, but I really have no proof or evidence for this opinion. I just know that there is more erratic price behavior (market noise) for the S&P 500 futures. These tick values may all change tomorrow. I examine and adjust them constantly, sometimes more than once a day.

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.

Klinger Can Signal Sideways Movements

I have noticed that when the Klinger Volume indicator reverses direction, but price remain relatively flat, as in this case, this is a sign that prices will continue in the same trend direction as is already in play, or prices will move sideways. This is a chart for corn today, which I have noticed that after trading higher overnight, has now reversed, and is trading below yesterday's settlement price (white dotted line).
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.

Signs of Upside Exhaustion

Now, we are seeing signs of exhaustion to the upside. On the 3-minute chart (left), the Klinger Volume indicator is starting to turn downward, and there is a bearish divergence of the same indicator (right) on the tick chart. Prices are also very close to their highs for the day, which is often a point of reversal on subsequent movements.

Reversal Higher Again

Now, prices have reversed higher again. Note the signals in order:

1. Reversal higher on Klinger Volume indicator before prices reverse. Again, the Klinger indicator has shown its remarkable consistency as a leading indicator.
2. Both the Bollinger Squeeze and stochastic indicators turn up almost simultaneously.
3. The Hull Moving Average and Gaussian filter (which are both smoothed exponential moving averages) turn up together.
4. The MACD turns up just as prices turn up.
5. Lastly, the 7 and 23 period moving averages turn up.
   

Another Reversal

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.