Fed FOMC Minutes Somewhat Dire

The Fed has indicated in its last FOMC minutes that even if economic activity turns negative, inflation fears may keep the Fed from cutting rates any more. Wow! Stocks are selling off as a result! Interestingly, interest rates are dropping on treasury futures!

Profit CORNucopia

Corn prices have now broken out of the stagnation of the past few hours and are moving forcefully higher! Soybean and wheat prices are higher, but somewhat unconvincing today.

Factals: Finding Order in Chaos!

What is chaos theory? What is a fractal?

Fractals As Entry and Add-On Points

I use fractals as entry points for new orders and to add to existing positions. Fractals are the safest points to do this with the least amount of risk because they occur precisely at turning and inflection points or at points where a dominant trend reasserts and/or reinforces itself. This reassertion phenomenon occurs repeatedly in the above graphic at the green arrows then the upward trend begins anew. Each of these fractal points offered an opportunity to add new positions.

Fractals Entries Minimize Risk
This involves less risk because if the reversal of direction fails at these points, it is immediately evident and a trader can exit quickly with only a small loss. One prominent trading book suggests adding only at the point where the previous high was surpassed (the red-arrow fractals in this chart), but I don't agree. By taking a new trade only as the most recent high is surpassed, a trader must accept that the trade very likely will go negative for at least a short time in the future. If, on the other hand, a trader buys at the green arrows just as prices confirm above the Exponential Moving Average, most likely the trade will be in the profit within a minute or two (and usually less), and will never go negative at any point. To me, this minimizes risk and maximizes profits.

Fractals and Phantom's Rules
This concept of using fractals at these inflection points is also harmonious with Phantom's Rules because it disciplines a trader to react quickly to remove or reduce a position unless it proves correct almost immediately under Rule #1. Fractals also provide a very clear point to add onto an existing position under Phantom's Rule #2, providing that all conditions are met for the add-on.

Definitions of "Fractal"
fractal (frac tl)
n. A geometric pattern that is repeated at ever smaller scales to produce irregular shapes and surfaces that cannot be represented by classical geometry. Fractals are used especially in computer modeling of irregular patterns and structures in nature.
n. Mathematics, Physics. a geometrical or physical structure having an irregular or fragmented shape at all scales of measurement between a greatest and smallest scale such that certain mathematical or physical properties of the structure, as the perimeter of a curve or the flow rate in a porous medium, behave as if the dimensions of the structure (fractal dimensions) are greater than the spatial dimensions.

Chaos Theory Explained

cha·os (kā'ŏs')
(Mathematics ) A dynamical system that has a sensitive dependence on its initial conditions.
(Physics) a dynamical system that is extremely sensitive to its initial conditions.
(definitions from Dictionary.com)

Chaos: Stochastic behavior occurring in a deterministic system...
Stochastic behavior is probabilistic behavior. (Stewart, Does God Play Dice?)
By placing both stochastic and deterministic in the same definition, the mathematicians have formed a bridge between the two sciences - two sciences that were regarded as mutually exclusive until then. Chaos is the study of deterministic systems that are so sensitive to measurement that their output appears random.
(excerpts from Introduction to Chaos Theory, by Mike Andrews)

Chaos Theory can be generally defined as the study of forever-changing complex systems. Discovered by a meteorologist in 1960, chaos theory contends that complex and unpredictable results will occur in systems that are sensitive to small changes in their initial conditions...

Although chaotic systems appear to be random, they are not. Beneath the random behavior patterns emerge, suggesting, if not always revealing, order. Recognizing that the stock market is a non-linear, dynamic, chaotic system /one stock market mathematician/ applies the principles of Chaos Theory in order to determine the pattern behind apparent random nature of market prices.
(from a website called, "Pi, The Movie")

Following are some images of fractal patterns as they occur in nature. They are often beautiful to behold. Fractals are the beauty and order of nature's chaos!

Fern fractals

Leaf fractals
Fractals in the meanderings of a river

Fractals in brassicas

Other

Oil at $132

Soybean Surges Late Overnight Session

Just minutes before the overnight session closed, soybean prices surged much higher. Some news event must have occurred to create such a tide of price movement within a short period of time. Soybean futures purchases in India were firm and demand was strong overnight. Nearly all of the price spike pictured took place within a 5 minute period. I will investigate this before the market reopens. It is likely bullish for prices when the day trading session begins.
I noticed that prices found support at the 50-day moving average. Is this a factor?

And the Dollar Moves Below 50-Day MA

Meanwhile, the Dollar continues to devalue, moving below the 50-day moving average (light blue on left chart). The overnight drop is significant. No wonder crude oil is higher!

Crude Oil Reaches $130

And still no resistance? Up more than $1 today alone.

US Dollar Reverses Rally, Moves Lower

Along with stock indexes, the US Dollar rally has faltered, and is quickly losing value against all major currencies again. The left chart of the Dollar Index futures shows the daily chart having reversed against the US Dollar over the past week, and the right chart shows today's intra-day 30-minute chart.

This is very bad news for the American consumer, because if this downward trend for the Dollar continues, it is almost certain to reignite inflation. Further, if Congress allows populist sentiment to lead it to interfere in the futures markets, prices may back off temporarily, but will ultimately head much higher. One reason for this is that, according to CME records, market participants who take only long positions tend to be well capitalized (pension funds, PIMCO are examples) and take long-term positions, whereas people who take short positions in the market (like me and other traders) tend to be small, short-term traders, because we don't have huge sums to take long-term positions in the market. Small traders like me are a check on unbridled buying by larger market participants, because we will short the markets quickly when they are overbought, taking advantage of counter-trends and market inefficiencies. When this happens enough, prices fall. Therefore, by restricting trading or banning futures trading, Congress would hamper those of us who tend to short the markets, thus causing prices to move even higher. Large funds would only be affected marginally. What a way to shoot ourselves in the foot!

Sinking Stocks -- Dow Off 200!

With a day this bad (the Dow is down over 200 points thus far with no end in sight), the Fed is going to think it must step in and interfere in the markets again. The trouble is that inflation is heating up even faster, with today's PPI showing inflation rising year over year. With crude oil at $129.50 and climbing, what is a central banker to do? Needless to say, I'm short the market today! Surprisingly, I was long yesterday! What a difference a day makes!

Disappearing Act: Stocks Erase 1 Week of Gains

In the first hour of trading today, stocks have erased the gains made during all of last week. What a difference a day makes! The daily chart on the left shows the erasure of last week's gains, and the right chart show today's losses thus far. Still, I wouldn't be at all surprised if the stock index futures reversed at some point today, and recovered at least some of the losses. It could be exciting!

Crude Oil Reaches $129 Intra-Day!

Wheat UP 4 Days in a Row!

If the price of wheat maintains its higher price throughout the day trading session today, the bottom I have been speaking of for the past few weeks will be firming. Wheat is now higher four days in a row, unless we get a strong reversal today. Note on this chart the very strong buying activity on the Klinger volume indicator in the lower panel, which is now crossing above the zero line. Prices are also now crossing above the 20 day moving average (yellow dotted line).

Winter wheat crops are showing signs of being at risk, and emergence figures are well below average for the last half of May, suggesting that this year's crop could come up short. Australia is also beginning to show signs of more drought. This may also be bullish for prices.

Stocks Fall When Inflation Reaches 6.5% Yearly

PPI this morning has reached 6.5% year over year, and stock index futures are plunging as a result. Gold and crude oil are consequently rising modestly, as this stocks the fears of greater inflation ahead.

T. Boone Pickens, the famous Texas oilman who, six months ago, predicted that the price of oil would go down temporarily until the summer, has reversed his prediction. On CNBC earlier this morning, he predicted that oil would reach $150/barrel this year. Remember that Goldman Sachs last week predicted $141 oil this summer. He bases his prediction on that fact that the world is consuming 87 million barrels of oil a day, and the world supply is only 85 million barrels. He said that demand decay is beginning to occur due to the cost, and that the balance of the supply shortfall is coming from inventories.

Stock Strength

Good day for trading the stock indexes. Stocks just continue to climb higher and higher.

Wheat Showing Signs of New Life

After a bearish trend that lasted more than 2 months, higher prices for wheat are suggesting that a new bull market may be in the offings. Note on the daily chart (left) that continued volume buying is starting to push prices higher. The Bollinger Bands are suggestive move of a consolidation pattern than a new bull market trend.

Today (intra-day chart on the right), prices have once again pushed through the $8.00/bushel price handle to suggest that a bottom may be in place.

Here's a Bloomberg article on the fundamentals of more buying:

Wheat Rises Most in a Week As Cheap Supply Boosts U.S. Exports

No Stopping Stocks Today

Stock futures have moved steadily higher throughout the entire trading session, virtually since the opening bell today.

Grains Stagnant Today

Soybean prices moved lower, but grains are largely stagnant today.

On days like this, I will immediately look for another trading vehicle that shows clean trading with sufficient volatility to trade well. Stock indexes and some of the currency majors fall into this category today. I use some software triggers to help me find these opportunities as they occur.

No News Is Good News for Stock Indexes

It is a good sign when a day without much news affects the stock index futures in a bullish way. Very stagnant overnight trading in the stock index futures and little news this morning would typically result in relatively benign trading. However, leading indicators that posted data as expected have helped the stock futures to move higher.

Selling Soybeans

Good news this morning for soybean consumers and makers of products that contain them! Soybeans have sold off at the open of the session, I suspect due to favorable and improving weather conditions in much of the growing region for the crop. Soybean prices over the past week have been trading within a relatively tight range of about $13.25 to $14.00 per bushel.

Non-Food Ethanol Coming?

A story I read earlier this morning. This sounds like good news not only for energy production, but for lower food prices as well:

The U.S. Department of Energy recently awarded SunEthanol a $100,000 research grant to help America develop clean transportation fuels from a variety of non-food feedstocks, including corn stover, bagasse, switchgrass, sorghum, softwood (pine), and high lignin poplar. This is the third DOE grant that SunEthanol has been awarded in the past year.

Here is the website of SunEthanol Inc:

Sunethanol

Corn, Soybeans Lower: Wheat Higher

Both corn and soybeans have moved modestly lower overnight, mostly due to favorable weather conditions this past weekend that have improved the outlook for good crop yields this fall.

Wheat is trading slightly higher, but on weak volume.

Crude Realities

Despite President Bush's visit to Saudi Arabia over the past few days attempt to persuade the Saudi's to increase the supply of crude oil to world markets, and despite the Saudi's decision to increase production by 300,000 barrels a day, crude oil prices have move still higher overnight. Crude oil is currently trading around $127.70 per barrel, barely off last Friday's fresh highs of $127.87. Since the front month contract expires tomorrow, we likely will see prices back off slightly for a day or two.

Congress Vs. Speculators

Executives of the Chicago Mercantile Exchange recently testified before Congress that there could be terrible consequences to trying to force speculators out of the futures markets. Here are a few facts that were pointed out:

• The Nymex increased margins 140% during 2007, and the price of oil doubled. Clearly, increasing margins won't bring down the price of oil
• Speculators are already required to put up 33% larger margins than exchange members who take delivery
• Restraining capital in this country will only cause capital flight to other places in the world where there is capital freedom. If this country doesn't accept or attempts to restrict capital, there are numerous other global futures exchanges where speculators can send their capital -- and they will.
  
• Research indicates that long traders tend to be much better capitalized than short traders. Therefore, increasing margins will only restrict those who short the markets, thus sending prices higher, not lower.
  
• Speculators only come into the market because the fundamentals are supportive of higher prices. Speculators don't drive prices higher; they follow the market.
  

Be careful what you wish for, because you may make matters worse!

Corn Collapse

Weather continues to favor more corn acreage and less soybean acreage. The charts of the two tell the story today.

Take Your Profits and Run!

Now, we are starting to see soybean traders take their profits and run for the hills today.

Wheat -- Buying on Daily Charts

This chart for wheat shows the daily on the left, and the intra-day market noise on the right. I am not trading wheat today for obvious reasons. The most significant aspect of this chart is the left one, bottom panel. It shows that heavy buying is stepping into the wheat market, following a drop of 40% over the past two months. I have mentioned this before over the past several days, but it appears obvious that there are some big players beginning to buy wheat. It looks like wheat is forming a bottom. At this point, wheat could simply trade sideways in a consolidation pattern for a time. (We often erroneously assume that prices trade only two directions -- up or down. Not so! Prices can trade sideways for very long periods of time.) Or wheat could begin a rebound. Much will depend upon fundamental factors like harvests in Australia and weather in the Northern Hemisphere. I will be watching wheat closely for signs that a new bull market may begin soon.

This Feels Like Something Significant Today

There is powerful movement in the financial markets today. Much appears to be related to a plunging US Dollar, as commodities are universally higher and the Dollar is taking a bath. Note here these charts this morning for three major currencies. Of course, when these move rapidly higher, the Dollar plunges. Many other currencies are also higher against the Dollar; these only only three examples.

Euro
Yen
British Pound

Stocks Retrace From a Bull Run

Stock indexes have been moving steadily higher in recent weeks on a bull run by climbing the proverbial "wall of worry". However, the daily chart on the left here shows that stock prices haven't risen that much over the past two weeks, and the Bollinger Bands are suggesting a trading range and resistance at the 200 day moving average. Today, shown by the intra-day chart on the right, stocks are showing some selling volume.

Soybeans - Temp Top, Anything Can Happen

Soybeans have now formed a top, at least temporarily. Anything can happen now. Prices could sell off through more profit-taking, or we could see still another round of buying. The daily chart at the far left shows that soybean prices started a bounce from their lows about a week ago off the Lower Bollinger Band, but prices are now at the Upper Bollinger Band resistance point at a price of about $14 per bushel.

"Anything can happen." -- Mark Douglas

Gold Back Over $900/Oz.

Commodities are broadly moving higher again, and the US Dollar is moving lower. The Dollar rally appears to have fizzled. Against all major currencies, the US Dollar is lower today. However, the US Dollar Index futures haven't shown much weakness. I have no explanation for that.

Is this the commodities bull round II?

And Crude Approaches $128/Barrel

Crude oil is on such a tear, that it appears it will never stop. Goldman Sachs issued a report this morning suggesting that crude oil will reach $141 per barrel for the second half of 2008 on strong demand from China. $5 gasoline isn't far away! That hurts!

Second Rise in Prices

Here comes the second wave of buyers. This is very typical behavior for the markets. The first wave occurs at the opening bell, and then some profit-takers will exit with quick profits. Then, after a few bars print across the screen, the second group of buyers will step in. This second group is typically much smaller than the first, and will result in a smaller rise in prices. Then, anything can happen, including a strong sell-off. However, I would be very surprised if the soybean market doesn't hold most of its gains from yesterday and today.

Meanwhile, corn and wheat are flat to modestly higher, but trading volume appears light.

Profit-Taking Requires a Fast Trigger Finger

I lost a little time on these two trades -- and a little of my profits -- due to an improper setting in my software that required a second confirmation.

Profit-Taking 1

Profit-Taking 2

It's a Bean Explosion

Soybeans have benefited from the rebound in crude oil prices after yesterday's brief sell-off due to options and contract expirations.

Wow! What a rebound!

Look at the spike in corn prices after being relatively subdued through most of the session.

Roller Coaster Day

Wheat has returned to the upside, and soybean prices have recovered half the losses for the day. When I mentioned in my last post that the selling was weak, this is what I was waiting for. Wow!

More Soybean Selling

The selling has resumed again, but there is no wind beneath the sails the second time. This suggests to me that volume is without conviction. I will wait now for greater strength in the next trend.

Wheat and Soy Rebound

This chart shows a stout rebound taking place now with wheat, but soybean prices also are now rebounding near the lock limit price. I have no idea if these rebounds occur due to profit-taking by traders who have shorted, or fresh buying at lower prices. I suppose that it really doesn't matter. After a rather stagnant week of trading, it is a welcome relief today to see some forceful volatility. I suspect that this sell-off is perhaps related to a similar rout in the price of crude oil today. The Dollar has remained relatively stable. Gold moved significantly higher for the day, but has since sold of somewhat, probably suffering somewhat in sympathy to other commodities.

Soybean Rout

The soybean sell-off has turned into an absolute rout. At this rate, we will likely lock limit down today, a 70 cent decline from yesterday's settlement price.

Prices Collapse

Corn and soybean prices have collapsed after sideways trading. On the daily chart (far left for soybeans), both corn and soybeans are in a consolidation pattern, and both have reversed in recent days at the Upper Bollinger Band. Corn penetrated the Upper Bollinger Band just a few days ago, and has been in a reversal pattern ever since.

Grains All Over the Map

Grains continue trading very erratically today, with corn and soybeans selling off modestly at the open and trading sideways ever since. Corn is down only a few cents this morning, and soybean prices are only down about 10 cents. Continued drier weather is providing hope that more corn will be planted, even though current crop plantings are only about 1/2 to 1/3 of normal at this date. Corn requires warm soil that is not too moist because it is highly vulnerable to cold and soggy soil conditions.

Wheat is modestly higher and holding its higher prices. I believe we are beginning to see early signs of a potential bottom in wheat on the daily chart (see chart at bottom of this post) despite the slight acceleration to the downside yesterday. The price of wheat has fallen 40% in the past two months, but that doesn't seem to draw much media attention. (If a trader had shorted wheat precisely at the top, that trader would be $25,000 per contract in the profit right now.) The downside acceleration yesterday was somewhat weak compared to the past, and may be suggestive of a consolidation (see the daily chart at the bottom of this post). Given that Australia is having a very good wheat growing season after two years of drought, it is hard to see a significant rise in wheat prices unless weather or yield prospects deteriorate significantly.

Of course weather can always change rapidly, and the situation can shift on a dime. I don't anticipate significant and lasting trend patterns until or unless the summer begins to show signs of either a bumper crop potential or degradation of yields (which can have innumerable causes). The bottom line is that it is just too early to see any long-term patterns developing. We are trading the weather and crop reports almost day by day.

Oftentimes, we will see sell-offs on Fridays as traders liquidate their positions before the weekend. We will then see traders place new trades following the Monday afternoon USDA crop reports, which give us clues to the progress (right now) of seed planting and the impact of weather for the previous week.

Corn -- Trading Sideways
Soybeans -- Early Selling, Sideways Trading
Wheat -- Modestly Higher Today
Wheat Daily -- Are We Forming a Bottom?
Note the heavy buying in the volume indicator.

Soybeans: Radio Static

Prices for soybeans today ended almost flat. The chart (above) looked like radio static, without any strong momentum either higher or lower. This is very poor follow-through on yesterday's strong soybean rally, and must certainly disappoint traders, farmers who would sell, and commercials alike.

Corn and wheat both sold off, with the long-term downtrend in wheat still intact, as mentioned on my previous post today. I barely eked out a profit in trading, and that was mostly from a small trade in 10-year treasuries and a better one selling corn. I should have sold wheat, but I let that one get away.

Wheat - Long-term Downtrend

Often, with all the talk of high commodity prices, the news media tends to ignore that many commodities prices are moving lower. Many of the soft commodities have been flat to lower over the past few months, including sugar, coffee, cocoa, and cotton. Both industrial and precious metals are also well off their highs from earlier this year. This chart for wheat is another example. The price of wheat has fallen 40% in the past two months -- more than $5.00 per bushel! The left chart is the daily chart, and the two in the middle and the right side show today's activity on intra-day charts. That daily chart for wheat has shown prices falling for more than two months!

Crop Plantings Fall Short of Normal

USDA reported yesterday afternoon that crop planting for corn and soybeans are only at about 1/3 to 1/2 of normal for this time of year. This falls terribly short of what we would normally expect for mid-May. It also begins to suggest that crop yields this year have the potential for also falling short of expectations. This is long-term bullish for prices.

CPI Data Flawed -- Again!

Last month, the US Government reported that gasoline prices at the pump fell 2%. Here is the daily chart for the price of gasoline future for April and early May. In fact, prices rose 13% -- in one month! You decide how accurate the government's reporting of the data was. Needless to say, the calculation and reporting mechanism for inflation by the U.S. government is fundamentally flawed. While all other developed -- and most developing -- nations' central banks are expressing strong concerns of future inflationary pressures, only the United States' central bank focuses only on "core" inflation and continually understates its impacts. The answer for "why" probably lies in the governments incentive to mislead so they can continue spending irresponsibly and suppress Social Security cost of living increases.

Food price inflation was reported at the highest in 18 years -- 8.4% annually!

Surging Soybeans

Better, drier weather across the Midwest has changed sentiment in the grains markets today. Corn prices have fallen with the greater prospects of more corn being planted, and soybean prices have exploded much higher with the greater likelihood that land will be planted in corn instead of soybeans. Prices have increased more than 40 cents from the bottom that printed at the open of the session.
While corn was down for the day, it also lead a late-session rally that erased most of its losses for the day.

Diversity of Futures Instruments

Lately, due to the growing number of voices trying to blame traders for higher commodities prices and seeking to ban our participation, I have been trading other futures instruments with greater frequency.

I have traded the 10-year treasuries and the S&P 500 futures with considerable success. They are both extremely liquid. However, I have a preference for trading treasuries. I have found that I can get better executions. I can also take larger positions, since the margin requirements are lower than for stocks. I have also found that they tend to move more smoothly and with less market noise than the S&P futures.

I have found that for evening trading, nothing can beat the S&P futures. They trade almost 24 hours a day except for 15 minutes in the afternoon (4:15-4:30 pm Eastern). However, I have found that during the off hours, executions are a little slower, even though spreads are still only 1 tick. I take larger positions and exit with only a few ticks of profit.

Oil Reaches $127

Crude oil prices have now reached nearly $127/barrel just minutes ago. The new record of $126.98 continues to push oil prices still higher.