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.

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!

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.

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.
   

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.

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.

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.