CBOT reports settlement price of $12.23

The Chicago Board of Trade is showing that its soybean futures settlement price for the March 08 contract was $12.23 rather than the $11.88 6/8 price showing on the charts. I have no idea why this discrepancy is so wide.

Soybean sell-off due to year-end profit-taking, or increased production?

Below appears a link to Bloomberg, where the soybean sell-off today is being attributed to year-end liquidations and increased soybean planting in South America.

To tell the truth, the fundamental reason for the sell-off is irrelevant. All that matters is that it occurred. If we are always trading to give the market what it wants (Bill Williams quote found elsewhere in this blog), then the reason is irrelevant. All that matters is that is occurs, and to trade in sync with the market.

If sales were due to increased production, then the sell-off could be a top, because this news could end the soybean bull market. However, if the sell-off was due solely to year-end liquidations, then fresh buying of soybeans may occur over the next several days. If today's selling was due to both, then it could make for very interesting trading in the coming days. Stay on your toes! It is an interesting article.

Here is the Bloomberg article:

Soybean Futures Fall From 34-Year High as Farmers Boost Sales

Are these two headlines from the same day?

Check out these screen captures of a few headlines related to soybeans. Can you believe they are both from today? One was from early this morning (bottom), and the second (top) was from after the close of the trading session this afternoon. Unbelievable!

Soybean top or year-end profit-taking on thin volume?

Wow! In the closing seconds of the day, soybeans sold off from the new overnight high, nearly reaching lock limit down, a top to bottom price fluctuation of more than 60 cents! I had to change to a 30 minute chart to give you a good look at what that looked like. I must confess that I took no trades today, including this one. The slow sell-off early on was unconvincing, at best. However, it accelerated (literally) in the closing seconds of the trading session, and I don't place new trades later than 10 minutes before the close of the trading session, especially prior to the weekend.

Holiday trading is also notoriously thin, so liquidity may become problematic. However, I have found that soybean trading this week has been very liquid and charts have been very smooth, clean to read, and easy to trade. I have had no complaints. These types of sudden price moves and shocks are not uncommon during the sometimes erratic thin trading conditions around holiday weekends.

What was the cause? Without checking the various news sites for fundamentals-related news, I would bet that it was caused by traders liquidating their long positions to take their profits in this calendar/tax year. Readers may recall that I have said that after the parabolic rise in soybean prices on Wednesday, I have anticipated a consolidation of several days or a significant correction. Never did I imagine this, however.

Rick Santelli, on CNBC, said that a tax-year profit-taking retracement was the cause of the sell-off (small compared to this soybean one) in crude oil today, and he implied that the soybean sell-off was for the same reason. Otherwise, this may be a blow-off top, but I have my doubts.

The second chart shown here is my tick chart. Note at the bottom the time markers. The grain markets close at 12:15 pm local time. Thus, this entire sell-off occurred in only about 1 minute of time. One minute! These types of things typically only happen at the end of a year, quarter, or when a global shock hits the system. Soybeans came to within less than one cent of its lock limit down price.

If this sell-off was due solely to profit-taking, then I would expect that many of these same traders will buy new positions after the first of the year, or perhaps even on Monday to carry over into the new year, and the price of soybeans will rise again. This would be a tremendous opportunity to buy into the soybeans bull market.

Soybeans in consolidation, as expected

Soybeans are still in a consolidation following the parabolic rise in prices earlier this week. I am not trading this downtrend shown in the chart. It is very weak, and eventually, prices will reverse to the upside. This slow, gradual downtrend is too weak to last. Perhaps soybean prices will find support at the low that was struck at the beginning of the trading session, or at the closing price for yesterday's session ($12.31 4/8). Prices are still higher for the day, even with this downtrend as shown here.

Wheat hits top, reverses

This is the daily chart for wheat. It has reversed and been trading down since last week. Looking at the longer-term daily chart, wheat will probably repeat for the next several days or a few weeks. We should then see wheat prices rebound again. Prices are down again today as well.

Gold bounced off 50-day Moving Average

Remember on Monday, Dec. 24, when I predicted that we would likely see a bounce in gold prices off the 50-day Moving Average? It has happened! In the daily chart shown here at right, gold prices bounced up off the 50-day moving average, most likely pushed higher by the weaker US Dollar the tragic assassination of Benazir Bhutto in Pakistan.

New soybean high in overnight trading

I new high was reached in soybeans at 2:25 am EST.

Subscribers take note

If you have subscribed to this blog to receive emails of my new posts, please take note that I often place a headline and just a few words of text simply as a place-holder on the blog. That is what is automatically sent out in the emails.

I will later write more and amplify with additional graphics and explanations following the close of my trades. Sometimes, I even have to correct tipos -- oops, I mean typos. Therefore, it is best to check the glob -- I mean blog -- frequently so that you are reading the most accurate and up-to-date posts.

Exchanges raising fees

You may have noticed earlier this week my post regarding fees charged by CME Group. Today, they have announced, along with some of the other futures exchanges, that they are raising their fees higher as of January 1, 2008. As I said previously, the competition of new exchanges being created will be good for traders. Perhaps it will help to cap these fees, or, better yet, perhaps the competition will lead to real-time data being available free and without delay, as I believe it should be. This would bring more traders and greater liquidity into the futures markets -- now wouldn't that be a good idea!

Up and down trading, but very profitable

These are ideal trading conditions for swing traders. I had four trades today that averaged at least $200/contract each. I also could have had a fifth, but didn't take it. This includes the last closing trade that occurred in the last 15 minutes of the trading session. Prices closed today down about 16 cents from the high around $12.46 yesterday.

I don't know how anyone could trade using anything but tick charts in these conditions, although the short-term (less than 5 min) charts are also good. Tick charts are so responsive that they demonstrate a shift in market sentiment within 2-5 minutes -- literally! When a fundamentals-related news event occurs, as in today's assassination in Pakistan, the ticks charts will manifest this change to me within seconds, or at most, within minutes. This helps me to nullify the advantage that some traders have who get this news sooner or faster than I do.

Tip:Click on the chart and open it in a separate window to view it in larger and greater detail. I like to open the chart in a separate window and then resize both the blog window and the chart so that I can read the commentary in one window and view the chart in a different window along side of the commentary.

The left chart shown is a 3 minute chart. Note how well the Klinger+ATR indicator gave me advance knowledge of a change in direction. However, the tick chart (shown on the right) is still the best one to trade with. Even with an up and down day, excellent profits can be made with consistency, using short-term and tick charts.

The Klinger volume indicator alone, however, is insufficient to trade with. I use 3 moving averages to help me confirm a change in market direction. The combination of both (Klinger + at least one MA) is necessary to achieve the consistency necessary to trade successfully day after day. The 3 moving averages are shown in the charts as follows:

• This top chart, where the candlesticks appear, has a red and blue 8-period Exponential Moving Average. It also includes Bollinger Bands, which I use primarily as dynamic support and resistance.
  
• The 1st subgraph shows the Klinger+ATR indicator, but it also shows a Hull Moving Average, which is a smoothed EMA. It is appears in magenta and blue.
  
• The 2nd subgraph shows the Bollinger Squeeze indicator as a red and green histogram. This subgraph also shows the slow stochastic and the Gaussian filter, which is also another smoothed EMA, but with very different settings than the Hull MA above. Interestingly, the two behave very similarly, which I take as a confirmation.
  

When I take a trade, I must see the EMA change direction (blue to red or vice versa) in the top graph as well as either the Hull MA or Guassian change direction toward my new trade.The main pattern that I watch for is one in which prices remain between the Bollinger Band (purple) and the EMA. When prices close at a new high or low, but that new high/low is within the Bbands, it is a sign to me of waning momentum. Once prices cross over both the Bollinger MA and the EMA, I prepare to swing to the opposing direction, unless prices go flat, in which case I will exit with a small loss or a small profit and wait for momentum to build again. One sign of this flat market is when the Bollinger Squeeze indicator changes colors (the dots on the 3rd graph from the top).

In addition to the Klinger and moving averages, I also require confirmation by a crossover of the Bollinger MA (yellow dotted line in top graph), which is a 20-period Simple Moving Average, and a crossover of the EMA in the 3 minute chart also. The movements on trading days like today are superb for day-trading swing traders like me.

In this last chart, we see 15 minute candles. If I had been trading this chart, I almost certainly would have lost money, since it is so erratic. I trade shorter-term charts because I simply don't have the patience to wait for longer-term trades to become profitable. (Contrast this chart at right with the top right chart at the beginning of this post. The other one is much smoother and easy to follow because it is based upon trades coming into the exchange rather than time intervals. I also can sleep better at night by day trading and closing out my trades before markets close each day.) I am also unwilling to accept the risk necessary to place wider stop losses. I rarely have a stop loss of more than 5-6 ticks.

As expected - slight retracement, consolidation

Today is starting as a rather mundane and typical trading day, and was expected following the rapid rise in prices yesterday(see my prognostications from yesterday). I would expect this to continue for a few days, so that market expectations can catch up with the record price rise yesterday.

It would be nice to see a little more volatility, because price fluctuations are low enough that some trades may lose money. However, some profits are still possible.

Sum-up of 12/26 soybeans trades

Today was the most profitable day I have had this year in trading soybeans. What a great way to finish the year!

Prices rose more than 46 cents from Monday's close. In the left (15 min) chart, the rise in soybean prices is clear and unidirectional. However, prices rose relatively little after the first 15 minutes of trading. On the 3 minute chart in the middle, you can see clearly the two trades I took today (one long, one short). The chart farthest to the right (tick chart) shows my last trade in the last few minutes of the trading day. While this small trade may appear minuscule on the 15 minute chart, it was a trade worth more than $300 per contract. And that's just the SMALL trade at the end!

Today was quite close to a textbook example of a typical trading day for soybeans. The day often begins with a short and small retracement or consolidation, following which a rise to higher prices occurs rapidly. After consolidation during the middle of the trading session, there is a sell-off and prices go down in the last 15-30 minutes of the trading day. This sell-off is almost certainly a result of traders liquidating their positions to take profits.

This chart is the most common pattern for trading soybeans.

There is one element of this chart, however, that is troubling to me. Perhaps due to light trading conditions following the Christmas holiday, the rise in prices today was parabolic in nature, and is usually subject to a sharp retracement, perhaps when regular trading volumes return after the first of the new year. This phenomenon may also manifest itself in a consolidation for several days, during which erratic trading conditions prevail. This consolidation pattern occurred just a week or two ago, following another parabolic rise in soybean prices. If past is prologue, perhaps this pattern will ooze from the market again this time.

This rapid price rise is highly reminiscent of the rapid rise of the EuroUsd in December 2004. In January 2005, the EuroUsd began a retracement that lasted throughout 2005. A rapid and unrestrained rise in prices like we have seen today in soybeans may also lead to a sharp snap back, like a rubber band that has been stretched too far, and now snaps back painfully as it slips from one's fingers.

Commodity prices rise with US Dollar vulnerability

Along with soybeans and gold, corn and crude oil have also risen to multi-week highs this morning. The USD has shown more vulnerability to the down side (see the chart of the US Dollar index, which is wrongly dated 12-25). There is a significant, if not strong, inverse correlation between the US Dollar and many commodity prices, especially commodities that are connected to inflation (gold) or fuel (soybeans, corn, crude oil). Even wheat was up 16 cents before collapsing later in the session.

Commodity inflation continues to swell with strong prices throughout the sector. What will the Fed do?

The Fed's Behavior

Probably they will continue to throw money at it, based upon observation of past Fed behavior. One must keep in mind that the Fed governors are all career bankers (except Bernanke, who is an academic), so group-think is their mentality. They operate with group-think banker's blinders in crises, so they are likely to react as the have in times past. Perhaps they don't realize that this kind of thinking and reactions are the cause of the problem, not the solution. The more they do it (create more and more money, which they call "liquidity"), the more they will reinforce the inflationary bias of the markets, and the more they will inject turmoil into the financial sector of the economy. They are amplifying a latent sense of panic that is building, and the more they interfere, the more they multiply this latent panic. They are almost guaranteeing a recession by interfering and creating such turmoil. They apparently don't realize that with so much Feddling (Fed + meddling = Feddling) they are creating a sense of panic in the markets. Ultimately, panic leads to greater turmoil and will eventually cause investors to remove money from the markets. I don't think this has happened en mass yet.

Unfortunately, the current election cycle is going to create even more pressure on the Fed to "do something!", so they probably will. Congress may act as well, which will also create more turmoil still. Turmoil in the financial markets appears to be the operative word to remember for the foreseeable future.

Soybeans approach lock limit before retracing!

Soybean prices today swelled the most I have seen for a single day in the time I have traded them, increasing more than 42 cents before retracing somewhat. Lock limit is 50 cents for soybeans. In my trading soybeans, I have never seen this lock limit reached. The Monday close is shown as the pink dotted line in this chart, and the lock limit price is the pink line at the top of the chart.

Even though selling pressure is quite high, as evidenced by the Klinger volume indicator in the subgraph shown, prices have not abated very much. This tells me that we are seeing some profit-taking, but that prices remain well supported for further price rises. I will go long again with additional positions when the Klinger and EMA indicators on my 2nd chart both turn UP again on the tick chart shown below. They appear poised soon to do that.

Gold moves significantly higher 2nd day in a row

Gold futures prices have risen dramatically for the 2nd trading day in a row, nearly $30 in the past 4 trading sessions. This increases the inflation bias that the Fed must deal with.

As you can see from my previous blog posts, a major inflection point was anticipated, and this may be the beginning of another leg in the gold bull market. Here is a link to an article on Bloomberg:

Gold Rises in Asia as Crude Oil Gain Boosts Inflation Hedge

Needless to say, the price of crude oil has also risen, once again to well over $96 per barrel. This is very bullish for oil prices, and bearish for the U.S. economy and the U.S. dollar.

Stock prices are down marginally this morning due to disappointing retail sales during the Christmas season, being reported by Mastercard at the low end of its downwardly-revised forecast. Also, in a related news story, housing prices are down more than expected. It seems hard to believe that softer home prices was unexpected. What world were those surveyed economists living on? It certainly wasn't earth!

Competition in the Futures Exchanges!

In an important news event, JP Morgan Chase has indicated that they, along with a conglomerate of other large banking institutions, will soon open a new futures exchange in competition with CME Group. CME Group owns both the Chicago Mercantile Exchange and the Chicago Board of Trade. The competition should benefit futures traders. I hope that it will result in reduced fees.

I have considered it to be a hit on traders, and a potential opening for more competition, that CME charges exchange membership fees for BOTH CME and CBOT, even though they are both owned by the same parent company. NYMEX does the same thing with NYMEX and COMEX, requiring traders to pay fees to both, even though they are the same company. This, I believe, needs to end, and I hope this competition will advance that time line somewhat. Here is the article on Bloomberg:

CME Falls After Report of JPMorgan-Backed Exchange

Significant: Gold stays above 50-day Moving Average

Note here that the price of gold, which rose significantly on Friday, is continuing to close above its 50-day Moving Average, shown in this chart as a light blue line. If gold is going to maintain its lofty prices, it should surge to even higher prices soon. This could also be the trigger for the next leg up in gold prices, perhaps initiated by additional inflation data showing that inflation is becoming unmanageable by the Fed. The Fed is very concerned not only with the inflation data, but even more importantly, with the inflation expectations created in the minds of consumers.

On the other hand, also take note in this chart that the Bollinger Moving Average, shown here as a dotted yellow line, is turning DOWN. It is also a hair's breadth away from crossing under the blue 50-day MA. Many professional traders use the crossing of the 20-period Simple Moving Average (which is the same as the Bollinger MA) and the 50-day Moving Average as a trading signal. I personally don't, but I watch them because I consider them to be an important indicator as a potential inflection point. It should signal a big price shift, either up or down, in the not-too-distant future (a few weeks).

Will Friday's price gush in gold be the beginning of the next bull leg, or the last sputter of an enfeebled commodity? Stay tuned...

March soybeans surpass $12.00

March 08 soybeans breached the $12.00 per bushel price handle during overnight, pre-holiday trading. This is not unexpected, especially since the new front month contract (March 08) is priced approximately $.20 higher than the Jan 08 contract. Volume today (12/24) is relatively light, but certainly sufficient for good trading.

This is not uncommon in the financial markets. Thin volume tends to create ideal conditions for amplified movements and erratic volatility. Throughout 2004 a few years ago, the EURUSD hit its greater and greater highs, which were amplified during the light volume of December trading. In early January 2005, when normal trading volume resumed, the USD corrected and rose for most of the following year.

I have been somewhat hesitant to trade soybeans and other grains during the trading days surrounding the Holidays, but I feel that trading conditions have been excellent thus far. In the future, I would have no hesitancy to trade grains during the Holidays. Liquidity has remained strong and solid throughout, erratic price adjustments haven't appeared, and price movements have not appeared to me to be abnormal. These are all conditions that have dissipated my hesitancy, and in future years, I would eagerly place trades throughout the Holiday season. That's good, because I really like to trade, and I genuinely miss trading on holidays and during vacations.