A Few Rambling Thoughts on Trading

I am going to share on my blog -- my trading journal, if you will -- some thoughts that I wrote to a fellow trading friend earlier today. There are several themes that meander through this email message. The primary one is the subject of achieving an automated system of software-based trading. This is a subject I don't believe I've mentioned on my blog previously. Other subjects include the use of the Weighted Moving Average along with the Exponential Moving Average, trading UP from a shorter to a longer time frame, the dynamic and changing nature of the financial markets, etc.

Here is the text of some of that message:

I may have mentioned in some of my blog posts that I was using some other methods of exiting trades (not Cahen’s). I still look for Cahen’s exits, but I have found that I can time them better than Cahen teaches in his book. The EMA usage is the best one. Right now, I’m also playing with an 11 period Weighted MA. It is slightly smoother than the EMA, and it tends to get me both IN and OUT of a trade slightly earlier. I want to code the one in TS so that it changes color like the one I coded for EMA (which I have attached to this email). I have put the WMA on my charts as a dotted white line (which you might notice in the charts on my blog – they’re barely noticeable). I’ve noticed that at some intermediate point in a trade, the WMA crosses over the EMA. At that point, I begin to ignore the Klinger Volume indicator. That point is somewhat of a turning point, because the trade is no longer vulnerable to possibly losing money. I am thinking about this WMA/EMA in terms of possibly programming it into some code at some point.

By the way, in his Encyclopedia of Technical Analysis Indicators, Robert Colby found that the WMA was almost as successful as the EMA – but not quite. It tends to be slightly smoother, much like the Hull and Guassian MAs. However, he told me in an email that he found the EMA he tested was only effective on daily charts --- not intra-day charts. He indicated that he ONLY tested on the daily charts. He didn’t know if the EMA was successful on intra-day charts. But he went out of his way to mention this fact. However, he also wasn’t using tick charts, as I am. My own experience with the EMA is that they are much more successful with tick charts than short-term time interval charts like your 10 minute one. I think this is because tick charts measure orders through the system rather than by some arbitrary time interval. The more orders that come through the exchange, the faster the tick chart candles print across the screen. While within 5 minutes, much can happen on a 5 minute chart if a shock hits the system, on a tick chart, as soon as the shock hits, the candles start to print across the screen very rapidly. And that affects the Bollinger Band patterns very quickly that Cahen teaches. In an automated system, entries and exits could happen very quickly and dynamically.

I have also found that on a strong move in the markets, prices may exhaust themselves on a shorter (tick charts, 3 min) time frame temporarily, but as time proceeds and prices get close to the EMA on the higher time frame (10-15 min), they tend to rebound off the EMA in the higher time frame (15 min) and continue in the original direction. I suspect it is because traders who are trading the higher time frame tend to add to their positions as prices begin to exhaust themselves. It is a rather remarkable phenomenon. Hence, if I am adhering to Phantom’s Rules, I will be constantly adding and removing contracts with the ebb and flow of the market. This would be extremely difficult – not impossible – to code into an automated system. Perhaps an automated system is one that will evolve over time as we find new twists on how to trade more accurately.

I can read Cahen’s book a dozen times, and I learn something new each time. While the translation is a little rough, most of it makes sense. You should have seen the translation of his earlier book published in 2001. It was so bad that some parts couldn’t be understood – by anyone! Cahen told me that a non-trader did the translation. It showed!

I agree with your thoughts on coding a completely automated system for the reasons you stated. Mark Douglas, in his book, says that a completely automated system ultimately fails. I’m not quite so fatalistic about it as he is. I know there are people who have accomplished it. However, they tend to work on one trading instrument, but not another (for example, it might work on the S&P mini, but not on gold or crude oil). Douglas says in the book that automated systems tend to work for awhile, but as the market changes, they lose effectiveness over time. This is another reason why I believe that any trading system must be DYNAMIC in nature. It must use indicators, support and resistance, etc. that are as dynamic and changing (able to adjust to change) as the market itself transforms and transmutes itself. What a challenge!

Complete automation might be very difficult to accomplish. For example, I keep very tight stops when I jump into a trade, but as the trade makes more money, I become somewhat more easy-going about it. Phantom describes this in Chapter 10 of his book (the one about John Denver). In fact, as a trade becomes very profitable, I will move to a higher time frame to manage it. I have moved from the tick chart to the 3 min chart for soybeans this morning. I will probably manage the soybean trade on the 3 min chart the rest of the day. How does one code THAT into software?

Another problem in designing an automated trading system is what to do when the prices lock limit. A system would need some mechanism to detect that and either exit a trade or not execute new trades. Fortunately with the expanded limits, this is becoming less and less of a problem.

There are numerous little iterations and subtleties that I use in my trading. Another one is that the longer a trade continues, the poorer the Klinger Volume indicator works. I also tends to work only for the direction of the prevailing trend. Klinger is great for getting me into a good trade early, but then it loses its effectiveness. Klinger is also very good when the market moves back and forth, up and down like a sine wave between flat Bollinger Bands. It is used for entry and quick exit of non-profitable trades, but is not effective for exiting highly profitable trades. Once my trade reaches about $150-200 per contract, I pay little attention to the Klinger Volume indicator.

Yesterday's Settlement As Support and Resistance

I have no explanation for this phenomenon, but I have noticed it many times. The previous day's settlement price tends to represent support and resistance. This is one reason why I mark it on my charts every day. Note the red dotted line in these charts is yesterday's settlement price. Note that frequently, prices reverse at that price point. However, if prices continue to bump against that point, eventually, they continue beyond it.

Soybean Rebound

Despite an expected further sinking in soybean prices this morning, prices have rebounded instead. In the futures markets, one must always expect the unexpected. That's why I trust my charts. They won't mislead me.

Unfortunately, when I study the fundamentals, they often do. I have found that there is always someone else who has more information, or has that information sooner than I do. However, as soon as traders start to act on the information, I see that activity manifested on my chart within moments. Then, I will take action. It is usually several minutes later than I learn the fundamentals-related reasons for what occurred.

Soybean, Wheat Lock Limits Expanded (Again)!

The lock limits for wheat and soybean contracts have expanded again for trading this evening. The soybean lock limit will be $1.05 and the lock limit for wheat will be $.90.

CFTC Commissioner Opposes Bush/Paulson Plan to Centralize Under Fed

Earlier today, in an interview on CNBC, CFTC Commissioner Bart Chilton expressed his opposition to the plan proposed earlier this morning by Treasury Secretary Paulson on behalf of the Bush Administration. That took some courage!

The U.S. Commodity Futures Trading Commission (CFTC) is the Federal regulatory agency that has authority over the futures industry, and has the regulatory authority and responsibility to ensure the integrity of the futures and options markets. It has worked extremely well for the industry!

Commissioner Chilton said that he heard about this plan through the news media, not from Sec. Paulson or Pres. Bush.

He also pointed out that the futures industry is an example to the rest of the financial industry of being liquid, fair, open, innovative, and service-oriented. (I agree with him.) He said that the futures industry and its various exchanges have provided the world with efficient, inexpensive, technology that has reduced costs and served its community exceptionally well. He also enumerated how the futures industry is different from other financial services, and it would be severely damaged by being subjected to regulations and authority that control other arms of the financial services industry.

The futures industry was born in the mid-19th century out of the need for liquid, consistent price discovery for the farming industry and those who purchased their products. No futures exchange or futures broker has ever gone bankrupt and left its clients without their money. The commodities futures industry has served its market participants extremely well. It doesn't need to be changed!

If it ain't broken, don't fix it!

Requests for My Help or Consultations!

I am receiving more and more requests from other traders who request my thoughts or suggestions on their personal trading. I am extremely gratified that other people value my opinion and would seek my advice. Unfortunately, I don't feel I can do this at this time-- with one quasi-exception that I will explain below -- for various reasons:

1. There are simply too many requests for my time and ideas than I could possibly make the time for. I receive many requests each week for help with trading. Sometimes I receive several requests each day. For practical reasons, this would be impossible.
2. My trading blog is one way that I can share the (limited) knowledge and expertise I have with other traders. In some cases, I may choose to address questions that I hear frequently by posting some ideas on my blog.
   The primary purpose of my blog is as the disclaimer says at the bottom. It is my personal trading journal containing my thoughts, methods, and trades. They are also my successes -- and occasional failures! I started this blog to replace the trading journal I kept on my PC. It keeps me accountable to myself for continued progress in my trading, and helps me to crystallize the things I have learned in a written record.
   If all this serves to help other people at the same time, then so much the better! But I take no responsibility for what others take from my blog, what they learn -- or for their mistakes!
   
3. For legal reasons, I am reluctant to offer suggestions. I am unwilling to open myself to even the remote possibility of a lawsuit. By giving free personal (one-on-one) advice to other traders, there is the potential of opening myself to unlimited liability without any compensating reward. It simply doesn't make sense. Or should I say, "cents".
   

Exception

I frequently meet with other traders in my local area. I will get together for lunch or just to chat. I am also working to build an organization for futures traders in Utah who want to form a professional association for the advancement of the profession and for the improvement of futures professionals. I have a vision for futures professionals in my locality who meet frequently to exchange ideas, improve our skills and record-keeping, and to provide friendship and camaraderie. I am always eager to make acquaintance with fellow futures professionals in my local area for mutual benefit.

Fresh Look at Corn; Changing Dynamically

Corn futures were the only grain that remained free for placing buy and sell orders throughout the day session today. Movements were very good and demonstrated the clean chart patterns that I discussed in my earlier post today.

Trading and Changing Dynamically

Traders must always remain adaptable and able to change to new circumstances. Phantom, in his book, says that a key skill for traders is to be capable of "behavior modification". Sounds simple, but its not! It is perhaps the most difficult aspect of this business!

We must be flexible and willing to change at all times. This is partly what I am referring to when I speak of trading dynamically. We must always change and adapt with the times! The markets are constantly changing like the ebb and flow of the tides in the ocean. This is one reason why black box trading methods eventually always fail. They are fixed -- static -- rather than dynamic. Something dynamic is something that is constantly shifting, adjusting, moving, and improving. If we are to survive on the seas, we much change and adapt with the markets! Right now, the stock market indexes are functioning in a vastly different manner than they were one year ago. Have our trading methods changed dynamically to fit them?

I know soooo many traders that trade only the stock index futures. They always trade the Russell 2000 or the S&P 500 futures -- no matter how bad the charts look, no matter how tight the trading range that the index is following, and no matter how much money they lose! Can you spell "stupid"?

I trade primarily soybeans. I trade other instruments (currency futures, gold, stock indexes, treasuries, etc.), but I mostly trade soybeans because the charts look clean to me, they are liquid, I can get good executions, they trade slowly enough that I can get in and out with accuracy, etc. I will probably continue to trade soybeans for some time to come. However, when circumstances change, I must also change. I will trade whatever instrument works well for me and has good-looking charts. (I know, I must be a raving lunatic to refer to a candlestick chart as "good-looking".) When the charts don't look right to me, I change to another trading instrument that does look right.

To continue to trade the same instrument regardless of how the tides in the financial markets shift, invites financial disaster. I'm in this business to make a living, so I can't afford the financial disaster of rigid, "static" trading. Go ahead and dig in your heels. I'll change when circumstances warrant!

Back to Corn

Although corn prices are the least volatile of the grains, perhaps todays price action shows a slight shift. I does for me, at least. Corn has a tighter lock limit because is shows less volatility, but it also has a significantly lower margin. But for me, the recent change from a lock limit of 20 cents to 30 cents opens a new vista in corn trading. Here's why:

A trader who might trade a single soybean or wheat contract could probably make about the same amount of money trading two corn contracts instead. The margin per contract for corn ($2025) is less than half that of either soybeans ($4388) or wheat ($6075). (These margins are stated as of 3/29/08 with my broker, RJ Obrien.) Furthermore, since corn futures have greater liquidity and sustain much tighter spreads during the evening trading hours (than soybeans or wheat), they can be traded at all hours. This is the best of all worlds, and it is only now becoming possible because of the wider lock limits that were implemented by the CME within the past few days.

Welcome to the world of trading corn futures!

Soybeans to Continue Downward?

Nearing the close of the trading session today, the ask pool of soybean contracts (waiting to find willing buyers) has gone from well over 63,000 contracts -- to only about 2000 in a matter of 10 minutes. I must assume that these are orders that have been canceled rather than filled. I have also seen similar huge pools of buyers and sellers that dissipated in the intervening hours before evening trading began a few hours later, and the soybean market began to trade freely again. However, this one feels to me like we may see more strong selling activity this evening when the market begins to trade again. The market has proven me wrong before. We'll see in a few hours' time!

The Gambler-Trader

As I mentioned in my last post, I may as well go flush my money down the toilet rather than attempt to trade charts that don't show order. I may as well donate it all to charity, because at least then it would do some good by serving society.

Many traders seem to use trading as a substitute for gambling. They treat trading more like entertainment, a rush of adrenaline, or an Internet-based casino, than a business. The Chicago Trading Pits should not be treated like Las Vegas! If you are guilty of this, do your family a favor, save your money and quit trading! Spend your money on counseling, rather than throw it away gambling in the futures market.

One sign of this "gambling" trader syndrome is that these gambler-traders tend to keep poor records. They don't treat it like a business. They also don't execute their trading plan effectively, jumping in and out of trades in a somewhat whimsical fashion. Instead of a disciplined approach in which they carefully mark their charts each day, study the news events, keep detailed spreadsheets, consistently set and achieve goals, and make precise records, they treat it like a part-time hobby instead. They don't keep spreadsheets, they don't set goals or meticulously work toward the achievement of those goals. They don't respect the power of the futures markets to ruin them financially. They don't plan their day. They don't keep a trading journal. But they do keep losing money! That is not trading! That's gambling, plain and simple! It is an addiction, not a business or a livelihood!

If think all the activities I mentioned above are too much work, then you are probably a gambler, not a trader. Trading is work! If you think its easy, you're deceiving yourself!

People who do this are doing their families a tremendous disservice and should get out of the futures market. They are doing no one any service except lining the pockets of their brokers -- temporarily. I use the word "temporarily" because eventually, they will go bust and blow through their trading account. This ultimately does the broker no service either, because the broker eventually ends up losing the client when they lose all the money in their account. Brokers have told me that they have a term for this -- churn. They must replace most of their clients every year because such a relative few make money. Those few feed off the majority who treat futures trading like a trip to Atlantic City via the computer!

This business is one that is appropriate only for highly disciplined, meticulous people. It is not one for wreckless adrenaline junkies! It is a business for people who have trained themselves to stay with a program for many years. It is not one for people who are akin to get-rich-quick schemes, playboys or high rollers. Engineers and air force pilots tend to make good traders because they are methodical and disciplined. Hot heads don't!

Women also tend to make better traders than men, although I have no idea what causes this particular phenomenon. This is merely an observation, not a commentary or opinion. But its also true, generally!

If you are committed to the changing your life and character to become a master of self-discipline, welcome to the futures business. If you think you are the exception to the rule, then you will lose all your money. If you are committed only to an easy way to wealth, you'll be eaten alive!

Disorder Becomes Order

I choose my tick charts for each trading instrument based upon how the chart looks and the amount of open interest on that contract. The greater the open interest on that contract, the greater the number of ticks needed to give my charts the orderly appearance necessary for me to trade them.

For the S&P 500 Futures

Relative disorder at 50 ticks
Appears much more orderly at 150 ticks

In the 50 tick chart, the price movements appear much more erratic, disorganized, and are much more difficult to trade. However, when I change to the 150 tick chart, price movements appear much more orderly, clean, and with fewer doji candles and shorter wicks. When one trading instrument becomes disorderly and erratic on various tick charts and time intervals, I look for another trading instrument. Today, with corn charts looking somewhat erratic and both soybean and wheat prices at lock limit, I have been looking for another trading instrument. The S&P 500 index futures would fit this bill today, based upon the 2nd chart in this posting.

Order In the Charts!

I have found that in general, the higher the time frame one looks at the charts, the more orderly they become. Most charts appear much more orderly on the daily chart than on the 15 minute or 5 minute charts. The higher time frames appear with less market noise and have a more clean appearance. However, most traders don't have the stomach to trade the daily charts because their account sizes are insufficient to weather the storms of market noise that occur.

If I can't find a chart that looks orderly to trade, I look for another instrument to trade. It is a waste of money to attempt to trade charts that don't have an orderly appearance. I may as well go flush my money down the toilet rather than attempt to trade charts that don't show order.

Often, a chart that appears orderly today will not be orderly tomorrow. In fact, even the intra-day charts will show great order during one hour and great disorder in another hour of the same day. Grains tend to appear most orderly for the first and last hours of the day session, and become more erratic in the mid session time periods.

Different Ticks at Different Tocks

At different hours of the day, a different tick value may be necessary to achieve the orderly appearance that I need to trade effectively. For example, during evening trading, I will set my corn charts to a tick value of 30 ticks. During daytime session trading when most of the volume occurs, I will change to a 50 tick value. I also lower my tick values when I trade the 10-year US Treasury futures during evening trading. I will often do the same in trading currency futures.

US Dollar Holds Support

The US Dollar Index has continued to hold support around 71.75 -- barely. Until a rebound higher becomes established, weakness is still the dominant theme for the Dollar. Otherwise, more bad news on the US economy could push the Dollar Index lower and set off a new round of selling.

Corn Sets New Record High Price Today

Following the release of the USDA Crop Report this morning, corn briefly set a new record high price before back off somewhat. The price of corn remains in record territory, however, with a previously-set record closing high price of 579 4/8 set on Mar 11th for the May 08 contract.

Wheat has again reached its daily lock limit down price, where it remains. However, the ask pool is relatively small.

Wheat, Corn Trading Freely

This chart shows wheat trading freely after touching the lock limit down price only momentarily, with the lock limit down price marked by a light green horizontal line.

Nature Conservancy Study Suggest Biofuels Increase Global Warming

More interesting news released over the weekend indicates that use of biofuels (corn, soybean, and sugar-based ethanol) increases global warming even more than fossil fuels do. How can that be?

With the higher prices of food (like corn and soybeans) that are being driven by the idea of making fuel out of them, more and more forest land around the world is being cut down in order to grow more of these grains. Thus, these forest lands that would have helped alleviate some of the greenhouse effect of carbon-based fuels are being cut down to grow even more ethanol-based biofuels.

This is a particularly stunning development, given that the study was done by an environmental group, the Nature Conservancy. It is an on-going study that will continue to be completed and updated annually.

USDA Report Staggers Market

Soybean and wheat prices have reached lock limit down following the release of the USDA report showing that acreage committed to soybeans was significantly more than even previous estimates had expected. Wheat is trading near the lock limit price, but soybeans locked limit down almost the instant the market opened, with an ask pool of nearly 40,000 contracts at the time of this writing.

Soybeans

Wheat

Corn, on the other hand, is trading higher because the acreage being planned for soybeans will largely be taken from acreage that might have otherwise been committed to corn. There are only a fixed number of arable agricultural acres available for planting in the United States. Over the past two years, many farmers have increased acreage planted in corn, but to avoid the possibility of greater pests due to progressive planting of the same land in a single crop year after year, and to avoid the higher cost of fertilizer, many farmers are rotating out of corn this year and into soybeans instead. Corn is a fertilizer hog, requiring nitrogen in particular, and fertilizer is made from crude oil, the price of which has also skyrocketed this past year. Thus, it was almost a certainty that large amounts of acreage that have been planted in corn the past two years would be rotated to another crop this year. Furthermore, since soybeans are a legume and fix nitrogen into the soil, they were a natural and likely choice for farmers to choose instead of corn.

Corn

USDA Report on Prospective Crop Plantings

Corn -- less than anticipated (bullish for prices)
Expected: 87,700
USDA estimate: about 86,000

Soybeans -- more than anticipated (bearish for prices)
Expected: 71,800
USDA estimate: about 74,800

Wheat -- about as expected

Bloomberg article link

Late planting due to wet weather in the Midwest also favors increased soybean acreage over corn, since soybeans can be planted later than corn. Continued rainy forecasts will be more likely to increase soybean acreage at the expense of corn acreage even more than the USDA forecast.

Global Investors Selling US Treasuries?

An interesting article on Minyanville is reporting that global investors, and especially governments, are beginning to flee US Treasuries. One wouldn't know it from today's charts, which showed significant price increases today, probably as investors exited the stock markets for safer waters. Here is the article:

International Investors Flee Treasuries

This is what makes my Klinger Volume indicator so interesting. Below are both the 15 minute intra-day chart for today, and the daily chart, showing the past few months. Note that in the lower panel on both charts, significant selling activity is occurring (note the red arrows). If this continues, treasury prices could fall precipitously, and interest rates would rise in response.

For months, many very savvy people in the world of finance have been predicting that governments with large US Dollar reserves would start dumping treasuries. Perhaps this is the beginning of the fulfillment of this prediction. South Korea's pension, the fifth largest in the world, has begun selling its treasuries, citing the need for diversification and poor yields.

15 Minute Chart
Daily Chart

Corn is Grain Gold!

Corn -- the world's grain gold -- staged a sharp recovery today due to expectations that both U.S. and world farmers may reduce the acreage they plant in corn this year, and on renewed concerns that wet weather may delay corn planting, thus reducing harvest output. The International Grains Council released its global report today, and the USDA will release its report on Monday. Corn ended higher for the day. I missed this rally. I wish I hadn't. If Monday's USDA report confirms the IGC's report, corn will likely rally much further!

Crude Oil Range Trading

Crude oil prices appear to have begun a pattern of range trading between the Bollinger Bands. Weakness in crude oil markets appears to have settled in, and energy prices have set a pattern of trading for the foreseeable future.

Gold Repelled, Turns Down

Note on this daily chart that the price of gold appears to have been repelled, and turned back. This may be significant, if gold closes below the lower Bollinger Band. This chart is suggestive of a consolidation and trading range pattern. The US Dollar is also still weak, but still maintaining support. Gold appears to be at a stand still until the US Dollar breaks in one direction or another.

Soybeans Bottom, Trade Again

Soybean prices appear to have bottomed, and are showing signs of active trading again. I'm glad that the new limit prices have worked and are serving the community well.

Soybeans have the greatest potential of the various grains to surprise the market Monday when the USDA released its crop report. This is because expectations are for farmers to convert much of the land that was previously planted in corn, to soybeans instead. If the acreage committed to soybeans surprised the market on the downside, soybean prices will probably rally higher.

Jose Kernen Reveals His Stupidity

This morning on CNBC's "Squawk Box", Joe Kernen, one of the co-anchors for the show, revealed his bias and stupidity when he suggested that congress should outlaw all margin futures trading, requiring all market participants to put up all cash to buy or sell in the futures markets. This would effectively ban futures trading for anyone but huge billion-dollar corporations that are self-funded, and drying up liquidity overnight.

He thought this would drive down commodity prices. What a stupid thing to say! One of the reasons that futures trading is effective for all traders is that the many participants in the market add liquidity. His absurd idea would completely dry up all liquidity in the futures markets. That liquidity benefits all participants, big and small, in the futures markets. It is the grease that keeps the futures markets vibrant and effective. That liquidity provides accurate and constant pricing discovery, which is absent in the rest of the world's $500 trillion derivatives pool that Warren Buffett describes as "financial weapons of mass destruction". It also provides a marketing mechanism for farmers year-round. Futures are the only liquid derivatives in the world, and Joe Kernen wants to destroy the only derivatives market in the world that works!

What will happen when Congress gets the same silly idea into their heads when other people on Wall Street begin to take up the banner and lobby for the same idiotic ideas? Or what if the Fed promotes that idea? Or some other lobbyist for an interest group that tries to persuade Congress that futures traders and hedge funds are the cause of inflation?

As I said, many of the traders in the futures markets are farmers, who market their products in the futures markets and plan to make delivery of their agriculture products. They buy and sell their products through futures, often with the intent to deliver the product at the end. If they couldn't sell their products, what would they do? Dump their product at the side of the road, the way they used to do in the mid 19th century before they could get honest prices, and before the Chicago Mercatile Exchange was created to provide the mechanism to accomplish that? What would America's agriculture pros do if only big corporations could get credit, but not America's farmers? These people are the heroes of our country, keeping our families fed and allowing the rest of us to live in more urban settings. Did Joe Kernen forget that?

Mr. Kernen thinks that liquidity provided by the Fed -- and backed by taxpayer dollars -- is a good thing. He loved the Fed bail-out and engineered JP Morgan rescue of Bear Stearns two weeks ago. He likes liquidity in the mortgage-backed securities market, and thinks that is a good thing. He even talks about the idea of the Fed and the taxpayers buying all the toxic mortgage soup his friends created. He also thinks that liquidity in the stock market is a good thing. He didn't suggest eliminating margin use in the owning of equities, did he? But he has the asinine notion that eliminating liquidity in the futures market would force prices down and eliminate inflation. It wouldn't! It would simply dry up pricing accuracy for farmers and add fuel to the toxicity in the financial mess his buddies on Wall Street created. It would very likely force prices even higher as farmers reduce their yields when they can't get a fair shake.

This absurd suggestion not only reveals his gross bias for equities. It also reveals how stupid the guy is regarding the laws that govern the financial markets, and what makes them work.

Futures are the only derivatives form that most people can participate in. They are also the only derivatives market in the world that is not only liquid, but has deep liquidity without constant government intervention that disrupts the markets. In 150 years, no futures broker has ever gone belly up in the United States and left its clients holding the bag! Not once! Can Joe's Wall Street buddies say the same? How many financial crises have been created by his buddies, including the current one? Perhaps that's why the futures market works, Joe!

The whole credit crisis and mortgage melt-down has occurred because his buddies on Wall Street, for whom he has such a love affair and bias, created derivatives instruments that aren't liquid and therefore can't be traded! They can't buy or sell them, and they can't price them. They just sit there like rotting refuse on the books of companies and pension funds around the world. And now Joe Kernen cheerleads while the Fed and the taxpayer is on the hook to rescue all that toxic financial waste. No one knows what all that toxic paper is worth. These non-liquid derivatives are the cause of the entire mortgage melt-down, the plunge in the stock market, and the current recession, and yet we don't hear Joe Kernen ranting against them, do we?

Why doesn't Mr. Kernen go back to studying biology? At least that's something he understands!

Perhaps we who work in the financial markets should express our displeasure to CNBC, either by email, or by bolting to the Fox Business Network or Bloomberg. Perhaps that would teach Joe Kernen a thing or two!

Soybeans Flirting With New Lock Limit

On the first day of the new 70 cent lock limit, soybean prices are flirting with lock limit down. On relatively weak volume and somewhat subdued trading, many traders are squaring up their positions in anticipation of the US Crop report due out on Monday. Like many others, I will not hold a position open over the weekend.

More Inflation Data

This morning, the Fed's preferred inflation indicator was released. It indicated that the PCE deflator was unchanged at the high end of the Fed's comfort zone at .2%, but just about as expected. Of course, just about everyone knows that government undercalculates inflation. Like a fox in the hen house, it has a motive to do so, since it provides cover to keep the Social Security COLA limited and for Congress to engage in more spending and for the Fed to continue inflating.

The PCE income inflation index was .5%, suggesting that income levels may push inflation higher.

The US Dollar is losing ground against the Yen and the Euro in the immediate aftermath of the data release.

U.S. Dollar At Inflection Point

As can be seen on this chart, the U.S. Dollar is close to its all-time lows. The Bollinger Band in this chart indicates that the downward momentum for the U.S. Dollar has been broken. However, this doesn't necessarily imply that a reversal is in the cards. From a probability standpoint, a consolidation at these low levels is a much higher statistical probability. If the value of the USD remains in a consolidation pattern at these low levels, an eventual continued downward movement is likely on an intermediate to long-term basis.

This is important, because it may have a significant impact on commodity prices and inflation. If the US Dollar Index futures close below the lower Bollinger Band, continued weakening of the Dollar will probably continue.

In recent days and weeks, the European Central Bank and the Bank of Japan have both hinted at the possibility of central bank interventions to halt or slow the fall of the dollar. This tough talk alone could possibly prevent the continued decline of the dollar -- for awhile.

However, once the markets become accustomed or adjusted to this lower level, represented in the charts by the Bollinger Bands flattening out for a period of time, then a further downward move in the dollar would be more likely. If the U.S. economy rebounds, the US Dollar will likely rebound as well. One critical testing point will probably be next week's jobs report on Friday. If employment in the United States declines and disappoints the markets, it could drive the US Dollar through the lower Bollinger Band and initiate a new round of US Dollar selling.

Commodities prices will very likely be somewhat dependent on the fate of the US Dollar.

More on Margins

Here is an interesting article with a different angle on the margin increase:

Higher Margin Requirements Wont Dent Ag Bull

Crude Oil $108

Trades for Today -- Good Conditions for Day Traders

I am now convinced that the increased limit price that will begin tonight, along with the higher margin requirements, will be tremendously beneficial for traders like me who prefer to day trade and close out their positions at the end of each day. There will be fewer lock limit days, and more days like today in which prices move back and forth. Swing traders will benefit from these changes.

Here are my trades for today -- about 20 of them.

Early Trading
Mid Session
Late Session

Nice Rebound, My Meandering River is Back

Very nice trading today. Look at the meandering river! This is soooooo much better than yesterday!

Positions Reduced Prior to USDA Report

The lazy trading has now begun to give way to moderate selling in the soybean market. Still, this controlled, significant selling is good for trading. Excellent trading conditions!

One of my favorite news websites is reporting that traders are reducing their positions in anticipation of the USDA crop acreage report next Monday, March 31. Perhaps the lower volume overnight and in early trading today is in anticipation of Monday's report.

They are also reporting that the new margin requirements begin at the end of today's trading session. They are also reporting that limits will increase tonight for both beans (new limit is 70 cents) and corn (limit expanded to 30 cents). This is significant, because it suggests that the increased margins have less to do with credit tightness, and more to do with expansion of limits to allow accurate market price disclosure. I see this as a very positive event, because accurate price discovery is beneficial for traders, I believe. The large number of limit up and limit down days in recent months have made it more difficult for day traders like me. The increased limits will help, I believe. Traders will be wise to take note of these developments.

Monday is also the end of both the month of March and the first quarter of 2008, so this may be a very busy day. This will probably have an impact on large fund trading, so strong, rapid movements should be expected.

The farmer strike in Argentine continues, lending more sales to American soybeans. This event is also significant because it underscores how geopolitical events can affect futures prices, and it emphasizes the supply concerns of tight global grain stocks.

Lastly, an emergency closure of the Mississippi above St. Louis is having an impact on cash sales, and thus, prices. This also tends to affect futures prices to some degree.

Grains - A Meandering River Today

The rout that might have been expected in grains hasn't occurred. My broker has not (yet) increased margins, even though the new margins requirements were published this morning. Either the CNBC report was erroneous or the margin increases are yet to come.

Treasuries futures margins were increased significantly, but other futures instruments weren't. After the forced commodity liquidations a few weeks ago, perhaps traders have learned the painful way that they should keep their powder dry and their margin accounts liquid so they aren't burned by sudden shocks to the financial system.

Soybeans are trading modestly to moderately lower, along with other grains. The charts look like a meandering river. Personally, I prefer trading of this type. I find that I make more money this way than when markets move suddenly and forcefully in on direction.

How can this be? I would answer with a question: Which river has a longer river bank? One that meanders lazily across a flatland in a snake-like pattern? Or one that moves forcefully in a straight line through a steep gorge or canyon? The meandering, lazy river ultimately covers more territory. The same is also true in the financial markets, but this trading requires more astuteness and trading back and forth. It's more work!

And that's just fine with me.

Deleveraging Hits the Commodities Markets

There will be more mayhem to come this morning when the grain markets reopen. CNBC has just reported that the Chicago Mercatile Exchange has just announced that they will significantly increase margin requirements this morning at the open of the markets. In some cases they will increase margin by as much as 50%(for corn) and 30% for soybeans. This is obviously the effect of the credit squeeze coming into the futures markets.

The price of gold has dropped precipitously on the news (but is now finding support and starting to rebound -- I'll probably buy), and so has oil. I expect the grains to be affected as well, but the grains markets are closed until 10:30 EST. This is likely to force many (not me, fortunately) to liquidate some of their positions in the commodities markets, driving commodity prices downward.

This has happened before. Just about two months ago, wheat margins suddenly increased, causing many traders to liquidate their positions and causing wheat prices to plunge. However, the effect was only temporary, since once these positions were unwound, wheat prices surged higher once again. I will seek to take advantage of this change both on the drop and again on the rebound, if events are similar this time. I suppose this provides an advantage to traders like me who don't overleverage their trading accounts. It will be another wild ride today, I suspect.

I can't help but wonder if this is possibly another machination to try to force commodity prices lower in an artificial manner. If so, it will only work temporarily, but the effect is likely to be significant on a short-term basis. We will know that there is some nefarious agenda behind it if margins on only food commodities are affected. It stock market index futures are unaffected, then we will know that this is part of a plan to artificially force food prices -- and thus, inflation -- down. One must certainly consider it questionable that with the extreme volatility in the stock markets over the past few months, margins on the stock index futures have not been raised significantly! This is no coincidence! If we see margins increased on treasuries also, this will be further evidence that manipulations of the financial markets are occurring in order to force money out of "safe" places (like treasuries, food commodities) and back into the stock market. Interestingly, the price of gold, after plunging initially, is rebounding vigorously.

It also teaches traders that they shouldn't use leverage excessively, because it could force them to liquidate positions and lose money. Stay out of debt, folks! Keep you margin at a healthy level, without excessive leverage! Especially during these uncertain times!

Grain Prices Soar Worldwide

I read this on an international news website:

Rice farmers here are staying awake in shifts at night to guard their fields from thieves. In Peru, shortages of wheat flour are prompting the military to make bread with potato flour, a native crop. In Egypt, Cameroon, and Burkina Faso food riots have broken out in the past week.

Around the world, governments and aid groups are grappling with the escalating cost of basic grains. In December, 37 countries faced a food crisis, reports the UN Food and Agricultural Organization (FAO), and 20 nations had imposed some form of food-price controls.

In Asia, where rice is on every plate, prices are shooting up almost daily.

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.

Oil Back to $106! Other Commodities Moving Higher, Too!

Here we go again! Sugar, cotton, coffee, and cocoa also appear to be building a price base today. Gold has held firm at $950/oz.

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.

Soybean Sell-Off, Sure Enough!

More than 10,000 bid contract orders were filled in less than 10 minutes. Who would want to sell into such a strong buying sentiment? Farmers, perhaps! They may be locking in profits by selling old crop soybeans while prices are strong. They saw prices plunge as recently as last week, and many will want to lock in prices while they are higher.

The farmer strike in Argentina is leading to food shortages and is causing soybean sales to be diverted to Brazil and the United States. Argentina is the world's largest exporter of soybean oil and meal, and the third largest exporter of the beans themselves, so the distress in this South American nation has no small impact on global soybean prices. The confrontation between the left-wing government of Argentina (trying to reign in inflation and deal with food shortages), and its farming interests, is becoming more heated by the day. This is keeping sales strong and is supportive of prices, but it is nice to see more balanced trading between buyers and sellers for a change. This is the first day I've seen this kind of balanced give and take for a few weeks!

Hint to Cristina Fernandez in Argentina and Hugo Chavez in Venezuela:
Cristina Fernandez, (new president of Argentina and spouse of the former president, Nestor Kirchner), you are stealing from the middle class farmers that produce your country's primary exports and economic prosperity. A tax increase of 45% will cripple your exports and your economy! You would think you would have learned from the catastrophe created by Chavez in Venezuela. Stealing from your nations' farmers and taxing them exorbitantly won't increase the food supply. It will decrease it, because you create a disincentive to grow and produce more in the first place! Food will end up costing more, not less! Socialists never seem to learn this lesson, and they always punish their people, doing more harm than good, when they attempt to force their will upon everyone else. It would be far better to increase the incentive for their farmers to produce more food through the profit motive, rather than punish them for being productive by imposing heavy taxes and price limitations. What do you think will happen next season if the farmers can't make money selling their product? The farmers will grow less next year, and prices will go even higher! Will these socialist goons never learn? Will their people continue to suffer?

Lock Limit for Soybean Futures

The bid pool isn't building as quickly as in the past, however, so this one is not as likely to stick! I expect further trading, as sellers step in to add liquidity and meet the demand. Volume today has been very strong, so there must be fairly good balance between buyers and sellers.

Corn, Soybeans Trade Sideways, Buyer/Seller Equilibrium

There continues to be a bid undertow, with relative price strength, but the momentum pattern of the past few days has been broken.

Who Said the Commodity Bubble Had Burst?

Crude oil, the last of the remaining commodities that had not regained its bull trend, has now taken the lead in the commodities markets in moving toward higher prices. However, most commodities appear to be forming a more consolidative, rather than trending pattern. If prices don't break through the past, recent highs within the next week or so, then range trading may emerge as the norm. I am very happy with this scenario, because as a swing trader, I prefer to trade both directions.

Erratic, Unsettled Trading Dominates

This can not be traded reliably. Time to wait for market noise to settle down.

Soybean Lock Limit, Plunge! Wild Day!

The EIA figures show an unexpected drop in crude oil inventory, putting upward pressure on crude oil prices and driving the price of crude oil through $104/barrel.

Initially this caused soybean prices to reach lock limit up. However, within minutes, soybean prices have plunged, following by more buying. I have noticed that the strong build-up in the bid pool is considerably less today, suggesting that buyer momentum is less than it has been in the past few days. What a wild ride!

Corn has fallen back to yesterday's settlement price, and is trading freely and with excellent liquidity.

Gold has surged to $950/ounce, and the US Dollar has continued to fall, following yesterday's drop.

Resurgent Oil Prices Likely to Drive BIofuels Higher

I am expecting another day of lock limit up activity for soybeans and possibly corn, given the surging price of crude oil once again. Virtually all commodity prices are in recovery and moving higher once again on US Dollar weakness, violence in Iraqi oil producing regions, and continued strong pressures on global grain supplies. The EIA crude oil inventory report, due out at 10:30 EST, may also affect prices of biofuel grains also.

Fed Expands Its Powers, Act II

Bloomberg has just published the second article within a week regarding the expansion of Fed powers beyond anything heretofore seen.

Here is an excerpt:

``The Fed is so far outside the traditional bounds,'' said Mason, a former economist at the Office of the Comptroller of the Currency, one of five federal bank regulators. ``It isn't innovative, it is taking a step back in time to a system of direct credit'' where the government decides ``who gets funding and who doesn't,'' he said.

Here is the link:

Fed Expands Role by Aiding JP Morgan's Purchase of Bear Stearns

Wheat Lock Limit Changes Again

It's hard to believe that less than 60 days ago, the daily trading limit for wheat was just 30 cents. Starting this evening, the lock limit for wheat will change back to $.60 per bushel. Wow!

Synthetic trading in the options market suggests that soybeans this evening may lock limit up again!

Gold Bulls Back in Business

Gold appears to have bottomed, and is now building a foundation for further upside potential. Gold is up more than $30/ounce from its low of $904.30 last Thursday on the Apirl 08 contract. I am long gold as of yesterday. Unlike other commodities, I tend to take longer-term positions on gold, primarily because it has a somewhat more erratic personality. I couldn't help but be struck at the similarity of the two charts above. The one on the right is the tick chart showing a period of only about one hour today, and the one on the left is the daily chart, showing a period of about two months.

The US Dollar rally has fizzled. This is no surprise given the weak fundamentals of the US economy, overspending of the US government, and inflationary monetary policy of the Fed. Perhaps it will consolidate, but the long-term sentiment is lower. This proably won't change measurably until the American people begin to reduce their debt, both collectively and individually. They are far too indebted for the long-term health of the economy and the currency.

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.

USDA Crop Report Coming Up 3/31

The USDA acreage report will be issued next Monday, March 31st. This will set the tone for trading next week, since it will give traders a very good idea of what to expect from the growing season this year. I expect trading to be extremely volatile that day, with a strong likelihood of lock limit prices being reached. It also tends to mark the point at which weather will play a large role in trading throughout the growing season. I'm looking forward to this with eager anticipation!

Dollar Dump!

Meanwhile the US Dollar rally has fallen flat, and the greenback has begun to fall once again.

Grains Gone Parabolic!

Corn and soybeans were lock limit up almost from the moment trading began this morning, and wheat has gone parabolic (see the chart, up nearly $1.00). Wheat has a lock limit of $1.35, so it has not yet reached limit up.

Grain, Soybean Explosion

In overnight trading, soybean futures are already closing in on lock limit up. Prices are just seven cents from the daily limit, and the primary day-time trading session hasn't even begun yet. Yesterday's settlement price is so far below the prices on the above chart, the line depicting it (yesterday's settlement price of $1257) doesn't even appear. Soybean prices are nearly $1.00 higher than where we started the week, and the Tuesday session open hasn't even started yet.

Commodities Come Roaring Back?

Gold is significantly higher, also, $30 off its lows. Only energy prices look weak, but don't expect them to stay down for long. Crude oil has remained resiliently above $100/barrel, and if it holds, prices will surge higher again also. So much for the commodities rout! So much for inflation being under control!

There are some excellent articles this morning on Marketwatch.com. Read the one by Paul Farrell about the necessity of taxes going up, regardless of who wins the White House this fall. Read also the one by Irwin Kellner about inflation and the M3 money supply. Greg Robb also wrote a good one called, "Painting Lipstick on a Pig".

Ultimately, there are only three ways to pay for the monstrous US Government deficits:

1. Higher taxes. There is little political will for this one.
2. Borrow from nations that save (China, Japan) or have oil wealth. Eventually, these people will no longer be willing to lend when they realize we can't pay them back.
3. Monetize the debt. This means that the Fed just keeps creating more and more fiat money, paying for the deficits with devalued currency. It also means inflation, as the US Dollar buying power depreciates. It could mean hyperinflation!
   

Look out below!

Soybeans Limit Up

It's been several days, but soybean prices have once again reversed to the up side. This is the first day in March that soybean prices have reached limit up. This is particularly remarkable, since soybeans have reached limit down seven times! Bid orders are also building rapidly, so its possible that prices may continue even higher in the future.

Soybeans - Almost, But Not Quite!

Soybean futures have been struggling this morning to reach the limit up price, but so far, no deal! Nevertheless, grain bulls are back in charge! Corn and wheat are similarly strong.

Grains Are Back, and They're Strong!

Strong rebounding price strength today is putting grains and many other commodities back on the charts. Soybeans are up more than 40 cents today, and may yet reach lock limit up for the first time in several days. The buying strength will very likely push prices to the upper limit. Corn is also higher, and wheat is up more than 60 cents today. Money is once again flowing into grains and other commodities.

Grains: Sentiment Mixed, But Solidly Up

Grain prices overnight were modestly higher, and soybean prices in particular appear to have reached a bottom, as indicated by the Klinger Volume indicator, which turned up late last week. Soybean prices were a solid 20 cents higher during overnight trading. I will be looking to liquidate my short position today if buyers come back into the market. I am always more quick to exit on a counter-trend movement, because they are higher risk on an elemental level. I am eager for the bull trend to continue, and today may be the day for that to happen.

Soybeans have traditionally been the favorite grain of speculative interests, and commercial funds, which are typically long-term traders, have added to their positions over the past few weeks while the hedge funds were liquidating, according to my sources and COT reports. This should soon provide price support, perhaps as early as today. Chinese buyers have defaulted on their contracts again, as they did last year, in anticipation of lower prices. They may be disappointed this time, as prices are moving higher once again.

My favorite trading style appears to be reemerging as the dominant form of profitable trading. As a swing trader, I feel that I profit more when prices trade between the limits rather than when prices reach the limits.

Go Beans!

There was a series of good articles on seekingalpha.com this morning on the subject of commodities, suggesting that the rout of the past few days was minor in comparison to the commodity bull market over the past several months. Gold is still at $920/oz. and crude oil is still over $100/barrel. Both are still substantially higher than they were just a few months ago (unlike real estate and stocks). They pointed out that that's not much of a rout!

But if stock traders and the Fed are satisfied that the commodity bubble has burst, then commodity prices will likely consolidate from here for a period of time (days, weeks) and begin moving higher again, albeit at a more sustainable and gradual pace. And that spells higher inflation!

Perhaps this time, however, it will stay below the Fed's radar. Parabolic rises in any financial instrument tend to burn out quickly, as has the short-term commodity bull since the first of the year. The more gradual longer-term bull, however, is still not only intact, but will once again begin to edge higher once the Fed's gaze is turned away, just like Frodo's posse moved quietly onward while the gaze of the Lord of the Rings was distracted away to other things. Here is a link to the commodity page on seekingalpha.com:

Commodities - Seeking Alpha

The Flow of Money: Out of Treasuries, Into Stocks

Investors had parked their cash in treasuries after the liquidation of commodities over the past few weeks, and those funds today are flowing powerfully out of treasuries (top chart) again and back into stocks (see chart below). After the Fed rescue of the financial markets last week, there is an improved sentiment that the worst may be past, and this is buoying stocks and money is flowing back. The money must go somewhere, and this looks like it may be the new bubble for the Fed. Stocks have always been the Fed's favorite asset form for money creation to inflate. It grabs the headlines, responds instantly to stimulus, is the darling of the news media, is widely held by investors of all types, and is effective at creating the impression of prosperity. I think I am finally ready to begin taking long positions in stock indexes again.

Interview on Gold With Joe Foster at Van Eck Funds

Joe Foster is the portfolio manager for some of the Van Eck funds, and particularly the famous Van Eck gold miner ETF (ticker: GDX). Following the collapse last week in gold and other commodity prices, resourceinvestor.com interviewed him, and the transcript can be found here:

Van Eck Gold Fund Manager Talks Market Conditions

Here are a few brief excerpts from the interview:

JOE FOSTER: In broad terms, the post-Bretton Woods financial system is failing due to years of overly accommodative monetary policies that have left the world awash in U.S. dollars. The symptoms of this financial mismanagement are the development of asset bubbles, excesses in credit creation and a collapsing U.S. currency. This, along with negative real interest rates and a potentially inflationary commodities price cycle are supporting gold as a financial hedge and currency alternative.

The gold bull market was primarily a dollar-linked phenomenon through 2006. Now, in addition to dollar weakness, we have layered on the weak economy, financial chaos and inflationary pressures. You couldn’t ask for a better scenario for gold.

I believe the U.S. is heading into the worst recession in many years and one that could possibly spread throughout the globe. The magnitude of the housing meltdown and the unprecedented failure of the credit markets make it unavoidable. I believe these problems will be supportive of gold for the many years it will take to return the markets to some form of normalcy. It’s an environment in which gold will thrive.