Wheat, soybeans approach lock limits again!

Lock limits often represent a barrier, because trader demand dissipates the closer prices move toward that price. People don't want to initiate a position just as it reaches it lock limit price.

Wheat lives up to its reputation!

I have often referred to wheat as the manic-depressive grain in this blog. Wheat is rapidly becoming my favorite grain to trade. It can be up, down, and up again in a single day! What a great grain to trade! It nearly reached lock limit up this morning. Then, it reversed completely and went down 26 cents from its high. It then started back up again, where it was again profitable at the time of this writing.

Wheat prices have twice tested the 50% Fibonacci level and held firm at about $8.75/bushel in recent days.

Soybeans get close to lock limit price, fall back

Soybeans rose rapidly this morning, also on the bullish crop report. This is the closest I've seen soybeans to reaching their lock limit price since I began trading, passing quickly through the old price high of $12.90, and reaching a price of $13.06 4/8 before retracing. At the time of this posting, prices were still holding firmly above the old all-time price high of $12.90, as mentioned above. However, while maintaining price firmness, soybeans have been trading somewhat erratically in the minutes since. This is to be expected, as bulls take profits and the markets digest the rapid rise this morning. I love to trade on days like this one.

Corn lock limit up!

On the bullish crop report this morning, corn was lock limit up on market open. The white dotted line is yesterday's close, and the white solid line is the lock limit price hit as soon as the market opened.

Gold hits $900/oz

Dow Opens Down 100+ Despite Bernanke Bail-Out!

As has occurred when the Fed intervened in the past, the stock market rallied yesterday. However, often over-looked is the delayed reaction to Fed interventions. Typically, within a few days following the Fed's bail-outs, markets then reverse to the down side. After Fed Chairman Bernanke's promises yesterday of more easy credit, I expected a longer rally. However, today, stock market fears have driven the stock index futures to reverse again and move sharply downward. This I also expected, but not quite as quickly as has occurred. The assumption in the markets is that because Mr. Benanke reacted so forcefully, the Fed must know that circumstances are much worse than we had thought.

Fed Blows It, Releases Bernanke Speech Early!

One reason why the financial markets reacted prior to Fed Chairman Bernanke's speech yesterday was that Mr. Bernanke's speech content was released -- in error -- more than 45 minutes too early! I know of one trader that lost more than $20,000 while he went to the restroom, due to the error.

I find it particularly intriguing that in reaction to Chairman Bernanke's speech, long bond rates of 10 years and more rose! The Fed promised lower interest rates, and bond rates went up! The yield curve is steepening, an ominously negative sign!

It is fascinating to me also that the more the Fed attempts to engineer a rescue of the financial house of cards, the greater the instability it creates in the markets! The Fed may deny reality, but the laws of true prosperity can not be denied! The collective wisdom of millions of people in the financial markets is greater than a few egocentric wise-guy plutocrats at the Fed, and they will act accordingly and appropriately in reaction thereto, in order to protect themselves. Do those Fed heads really think they can suspend the laws of economics forever?

Import Prices UP 10.9% Year-Over-Year

Despite Fed Chairman Bernanke's denials yesterday, import price inflation for 2007 was up 10.9%, year over year. That's an amazing number that underscores the great impact of inflation than what the Fed and the U.S. government want to acknowledge. Considering that the government's inflation calculations are intended to minimize and underestimate the true measure of inflation, an import inflation rate of nearly 11% is almost certainly much higher than the headline figure! Inflation is not only alive and well, it is rising rapidly! Even the November import inflation number was revised from a large 2.7% one-month increase to an even more monstrous 3.3% inflation rate. And that was a single month rise!

When one considers that the government changed its inflation calculations 10 or so years ago to minimize and underestimate the true inflation rate, this is a particularly revelatory headline.

Gold $900 dead ahead!

Fed Chairman Bernanke roils markets -- again!

Fed Chairman Bernanke sent gold prices to a new all-time high, with prices rebounding $20/oz. on the heels of his speech promising aggressive interest rate cuts. Grains prices rallied also, after being depressed for a few days. Other commodities prices will probably go much higher over the next few weeks and months.

"Helicopter Ben" is in denial of the reality of inflation and the influence of the Fed's "cheap money" policy on the creation of bubbles and the ensuing deflationary effects of its boom-and-bust, irresponsible monetary policy. This seems downright disingenuous considering that it was he that made the statement that the government could inflate its way out of deflationary pressures by simply printing more money and throwing it out of helicopters. By his own words, he knows better. And that suggests he is being intentionally deceitful, and that his denial is strategy, not merely denial! More inflation... on the way! Thanks, Ben and Co.!

Oddly enough, 10-year treasuries sold off, increasing interest rates and the yield spread between 2-year and 10-year notes. Investors must be beginning to get worried, and are now starting to demand higher returns. When the interest rate spread increases, its because long-term investors are increasingly worried, so they are demanding more interest for taking the risks of long term investments in U.S. government bonds. It's about time!

The stock market loved his speech. It will rebound for a few days, and then, as with previous promises of easy money from the Fed, reality will set in, and stocks will plummet again. That will be a good time to fade the market and sell!

The laws of true prosperity economics can not be denied, despite the Fed's being in denial!

I have always been intrigued that, contrary to popular urban myths, the Fed causes more market turmoil by its interventions, not less! If the Fed had stayed out of the subprime credit mess 6 months ago, we would probably have had a recession that would have passed by now, since the average recession lasts only 4-5 months. Instead, constant and repeated Feddling has delayed the inevitable, and created more and more turmoil, not less. The Fed's interventions do not bring stability to the financial markets; rather, they amplify the instability!

Crop Report tomorrow

Heavy trading is almost a guarantee tomorrow, with the release of the crop report at 8:30 am EST. I smell money!

Bollinger Bands as dynamic support and resistance

I use Bollinger Bands, in part, because they provide dynamic support and resistance. This concept is explained in great detail in Philippe Cahen's book, Analyse Technique et Volatilite (still published only in French). I have noticed that this is particularly true in a consolidation period following a sustained price movement, as shown in the above chart example of this tick chart. (The strong price movement was depicted at the bottom of my last post. The chart above shows only the consolidation phase.) Note how well the Bollinger Bands, shown in purple, provide dynamic (vs. static with many other forms, like Fibonacci numbers) support and resistance. Prices have a tendency to reverse at prices very close to these Bollinger Bands. Since Bollinger Bands are based upon the science of statistical analysis, this holds true for most liquid financial instruments. When prices close outside the Bollinger Bands, this is indicative of rising volatility, and thus, increased momentum in the direction of the prices. Following a consolidation, this is a signal to take a trade in the direction of that Bollinger Band break-out.

When prices (move and) close too far outside the Bollinger Bands, they have a tendency to snap back inside those bands, at least temporarily. In a strong move like what we are seeing in todays grains, prices will show a pattern like the one above (first chart at the top of this posting) on shorter time frames, while they will appear to move back inside the Bollinger Bands for a period, as shown on the second chart depicted here of the 3-minute chart. The consolidation in the chart at the top of this post is also depicted in the section where I have placed the red arrow in the second chart (above right).

Prices and the Exponential Moving Average
Interestingly, as prices approach the Exponential Moving Average in this second chart (shown as a blue line), they are more likely to surge to even higher highs, as we can also see has occurred in this second chart. If prices close below the EMA instead of moving higher, then prices are more likely to consolidate (greatest probability) or even reverse. A reversal is more likely following a consolidation rather than a sudden reversal in an uptrend. In the example shown (above right with red arrow), after prices closed below the EMA (when the blue line changed to red at the second-to-last completed candle, which was red), a consolidation emerged immediately after the screen capture of this chart was made. Another clue of quickly-falling volatility and and end to the price movement is manifested also by the new high price (third from last completed candle -- a slightly imperfect gravestone doji for those trained in Japanese candlesticks) that closes within the Bollinger Bands. This phenomena withe the EMA is also proliferated into the 15-minute chart, as prices later moved upwards again as the EMA in the 15-minute chart provided additional support (not shown, as it occured after these screen captures were made).

Bollinger Bands and the Triptych

This is one reason why I keep multiple time frames on my charts at all times (as shown in the third chart in this post just above this paragraph), because I want to have the perspective of what the Bollinger Bands are doing on higher time frames as well. Cahen calls this a triptych in his book, a perfectly appropriate term. This proliferation of patterns from one time frame to the next occurs with a high degree of reliability on all time frames. Note that the period shown in the first chart above as a consolidation, is also depicted in this second chart as a period of flat trading, following a strong movement outside the purple Bollinger Bands, which resumes once prices approach the Exponential Moving Average. When prices move so rapidly so fast, and thus move farther outside the Bollinger Bands than is statistically reliable, a period of resting prices (consolidation) is needed before prices can resume their upward path. Cahen also explains this concept in considerable detail in his book. I think of it as being somewhat like a rubber band. The more tension that is created on a rubber band, the more likely it is to snap back with some force.

Since Bollinger Bands are based upon statistical analysis, anyone who has been trained in statistics and an understanding of standard deviations from a mean can understand how this force influences prices in the financial markets. Bollinger Bands are based upon standard deviations from a mean, and thus, they can help us to read and understand the financial markets.

Higher Prices and Inflation Ahead?!
This surge in prices is suggestive of continued bullish price strength in the longer-term charts for the grains. We should see still higher prices (new all-time highs in soybeans) very soon. The all-time high price in a front-month contract in soybeans is still $12.90. This price may provide some resistance, but I expect it to be eliminated soon, probably within the next few trading days.

If, in Fed Chairman Bernanke's speech today, he attempts to minimize the inflationary influence of high commodity prices, and/or he signals the markets that lower interest rates and looser monetary policy lie ahead into the foreseeable future, this price surge to higher highs will probably occur sooner rather than later. $12.90 soybean prices may very soon be a very distant memory in the past, despite dissipating momentum and selling volumes on the daily chart (see my previous post earlier today)! This could cause buyers to step into the market once again to force the Klinger volume indicator to begin moving upward again and resume the uptrend in soybeans and other commodity prices.

Can you spell inflation? I knew you could!

The bulls come out to play!

Finally the bulls came back out to play today. I had been anxiously awaiting this! These are today's 3-minute charts for corn (upper chart) and soybeans (2nd chart). Wheat is also showing similarly significant strength. The tick charts are even more impressive. I have included a screen capture of the soybeans 30 tick chart at the bottom of this post.

Broad-based commodities volume weakness

A phenomenon that I noticed a few days ago is apparently starting to amplify. It is a broad-based weakness in new volume needed to sustain price strength in many of the most liquid commodities, including crude oil, gold, soybeans, and corn.

The charts shown below are for the above-mentioned commodities. In each one, I have placed a blue ellipse (circle, but more elongated instead of perfectly round) around each one. Most of these same commodities are also showing signs of falling Open Interest. I have not shown the Open Interest in these charts; however, on my daily charts, I keep a 5-period simple moving average of the open interest for each of them, and in all cases for these commodities, this simple moving average of open interest is also falling.

What Does This Mean?
Does this mean that the commodities bull run is over? Not necessarily. However, it certainly seems to be significant that volume-based activity is showing net selling for all these commodities, despite recent higher prices for them all. Any commodities buyers should be cautious when volume buying is so weak, and I am considering only short-term trades with tight stops. It is my opinion that after such bullish prices for so long, even if the current bull is over, prices are more likely to consolidate rather than fall precipitously.

In his book, Trading Day BY Day, Chick Goslin says that the larger and more liquid a particular financial instrument is, the more likely it is to remain in that trend (Law #2). An huge ocean liner takes a much longer period of time to turn than a small speed boat. That being the case, I believe that prices should remain relatively well-supported. Grains particularly, because they are a food commodity, should remain strong, since people must continue to eat. At the end of a trend, prices are more likely to consolidate rather than reverse suddenly.

Conventional wisdom is that during a recessionary period, commodities prices tend to fall due to decreased demand. However, in past recessions, there was not as much speculative, electronic trading to provide additional liquidity and price support. The phenomenon of rapid growth in China and India didn't provide price support, either. I am guessing, but my best guess is for a period of price stability (consolidation) and range trading, albeit at much higher prices than in previous recessionary periods, for several days or weeks. If the U.S. economy returns to positive growth soon, the commodities bull market will continue upward as well.

Crude Oil


Gold


Soybeans


Corn

Bollinger Squeeze: Grain trading goes flat

The Bollinger Squeeze Indicator

In the two charts (following in this post), I have placed a blue rectangle around an indicator called the Bollinger Squeeze. This indicator was originally developed by a Tradestation subscriber, and was called NickM Next Big Move. It looks like this:

The Bollinger Squeeze indicator uses a Keltner Channel and Bollinger Bands to find a period in which market volatility is too low to take positions, and to predict which direction the next break-out will most likely occur (although I personally don't think it works that well in predicting the direction of the next momentum move). When the Keltner Channel lines contract to within the Bollinger Bands, it indicates that volatility has declined.

If there is one weakness in this indicator, it is that it tends to lag slightly, but it is still very valuable. However, I have found that in alerting a trader to both falling volatility, and notifying a trader of rising volatility, it tends to lag slightly behind the fact. This is probably unavoidable.

The Bollinger Squeeze was later commercialized by Carl Senters (if I recall correctly his name), who has developed and sold the same indicator for profit. It is available free if you have and use Tradestation. Obviously, you must be a Tradestation subscriber to download and use the indicator from the Tradestation forums.

Grains and the Bollinger Squeeze

In both of these charts -- one for corn, and the other for soybeans -- we see minimal volatility in trading today. Even though corn had a slight downtrend, it was minor and expected after a rapid rise in corn prices over the past few trading sessions. Corn has been the grain most well-supported in prices recently compared to the other grains. A period of lower volatility and a minor pull-back was expected.

Wheat was relatively subdued today, but maintained sufficient volatility for profitable trading.

In these two charts, I've bracketed the Bollinger Squeeze indicator in a blue box. When the blue dots occur at the zero line in this indicator, volatility is sufficient to take new trades. However, when the green dot occurs, followed by the red dots, volatility is low and insufficient to take a new position in the market. I have bracketed this phenomenon in both of the charts in this post. It is extremely unusual for these red dots to continue for very long, as we see in these two charts.

The good news, however, is that periods of low volatility tend to create pent-up demand that builds tension in the market, so it is predictive of high volatility to follow. The longer this period of low volatility lasts, the stronger the demand build-up is, and the more forceful will be the break-out when it occurs. That means that good trading conditions will occur again eventually, and the longer the low volatility period lasts, the stronger will be the new break-out when it happens. Volatility is what creates trading opportunities for traders.

There is a tendency to take a break and leave the computer when this condition occurs. However, that would be a mistake. It is better to remain alert and watchful, because the break-out can occur quickly and without much advance notice. When it happens, traders who have been waiting on the sidelines will jump and and place positions quickly, and prices will move very rapidly. One must be waiting at the ready for this situation to occur, because volatile trading conditions are the bread and butter of professional traders.

It is noteworthy that others commodities prices were also relatively subdued today. After reaching new all-time historic highs overnight during the European business day, gold was relatively quiet during the trading session in the United States.

Two great soybean trades in early trading

At the market open, I took some quick, good trades. I am learning that the market open often provides some of the best trading opportunities, and today was no exception. It's a good thing I did, because the market went flat after that.

Gold nearing $900 benchmark

Gold has continued to trade even higher during the evening hours, setting new record all-time highs over $894.00/oz, and approaching the $900 handle.

Best trading day in several months!

Today was the most profitable day in trading that I have had in several months. Normal volume appears to have returned to the financial markets. I even shorted the stock markets, since it seemed to be all the rage today. This was a day for celebration!

Wheat - the manic depressive grain!

Can you believe this chart? Timing in trading grains is essential. If you got out of this first long trade too late, you would have been selling into a panic of long traders trying to get out just as everyone else was doing the same.

The lesson? Don't get greedy. Take you profits! And the corollary is to take you losses early. That way, you stay in the game to play another day!

Soybean prices - past is prologue

If this 2 hour chart is indicative of what we should expect over the next few days, soybean prices should continue to surge to a new all-time high this week. Look at the last move up in prices last week. After a quick, 2-hour explosion in prices, more buying activity continued to push prices higher still over the next few days. I expect another price high this week, probably taking out the previous high around $12.90 (years ago), and likely surpassing the $13.00 handle.

Corn: grain gold

Corn moves higher and higher today. Prices continue to set new record highs, even more than other grains. After three days of near stagnant activity in the grains complex, it was time for bullishness to reemerge, if the grains superbull was to continue. We are seeing that now, and particularly with gold.

The second chart shows the daily chart for corn. Note that the Klinger volume indicator is still bearish. This is why the Klinger indicator must be combined with a good momentum and/or trend indicator like moving averages. Stephen Klinger, the originator of the Klinger indicator concept, says that the Klinger indicator is most effective when trading in the direction of the dominant trend. It's beauty is that it is a true leading indicator, so it gives a good "heads up" for when sentiment is weaking in the existing trend, or when sentiment is changing toward a new direction.

Grains activity gets back to normal!

It's about time! The past 3 trading sessions have been difficult, but expected following the rapid rises in prices earlier in the week last week. Note in the soybeans tick chart at right how smoothly the movement were that took place today. Soybeans, wheat, and corn are all showing heavy activity early in the trading session. I never thought I'd admit to being glad that the holiday season was over, but I'm glad activity levels are finally returning to normal. Movements are good and volume is high this morning. This makes for very good trading activity.

Wheat and corn are also very active. Wheat was headed to an early lock limit up, but has since backed off somewhat. See chart #2 above for wheat.

Corn is also up strongly this morning with excellent volume and strong buying activity. These are good days for traders. Corn is the strongest grain in holding higher prices this morning without any significant retracement. Corn is chart #3.

Gold: What a difference a day makes!

During the European session, gold has risen to a new all-time high price. Gold tends to be a place for investors to park their money during times of fear or inflation. Right now, both fear in the financial markets and fear of inflation seem to provide strong support for gold. The chart at right shows the rise to new, higher prices on the 15 minute chart.

The second chart, below, shows the daily chart. Note that the KLinger volume indicator has turned green again, indicating that buying has returned to gold.

Corn, gold, other commodities showing some bearish signs too

On the daily chart for corn, there are also some bearish signs. The Klinger volume indicator (red and green in the 1st subgraph beneath the price chart), volume is showing increasing selling pressure, which is an indication that profit-taking is the prevailing sentiment. The Bollinger Squeeze indicator, as shown in the histogram in the 2nd subgraph, has turned to dark green, an indication of falling momentum and volatility. Another indicator of waning momentum is that even though prices moved higher, they closed within the Bollinger Bands, whereas higher prices had previously closed outside the Bollinger Bands.

Until prices break through the EMA, and perhaps one additional moving average, I wouldn't consider a short trade. Furthermore, the Bollinger Moving Average (20-period Simple MA) is still a significant distance away, so resurgence of the existing trend could certainly drive prices much higher still.

Commodities Inflation Revisited

One of the articles to which I provided a link the other day has predicted corn prices of $6/bushel, so prices could certainly go much higher still. Here is a repeat of that link:

2007 Was Commodities Banner Year, More Reasons to be Bullish for 2008

Here is an opposing viewpoint posted today on Seekingalpha.com:

Most Commodities Currently Overbought, Led By Gold

In the daily chart for gold, shown at right, the Klinger volume indicator appears to confirm the above headline, as it has turned red, a sign of selling activity, and the possibility of lower prices ahead. Crude oil has also turned bearish, although I haven't posted a chart.

The above two articles, both from the same source, appear to contradict one another. That isn't necessarily so. The second article appears to be more short-term in focus, whereas the first one is clearly oriented to a longer-term perspective. I interpret this to suggest possible short to medium-term price weakness or a correction, with commodities prices continuing to rise after this pull-back or correction. Quoting from the second article, "While commodities in general are in a solid uptrend, it wouldn't be surprising to see some of them stall in the short term." To me, this suggests taking some profits and preparing for another bull run in commodities after a short pull-back or consolidation phase.

Soybean bearish divergence

Here is the bearish divergence that I mentioned in my last post. I have drawn a burgundy line in the subgraph that shows where it is located. I have also put a red arrow below the divergence. Any divergence on the daily chart should be considered significant.

At this point, with soybean prices still strong, and remaining well above the Exponential Moving Average, I am looking at this phenomena as a potential opportunity to buy when prices resume an upward path. However, I will take careful mental note of the possibility of a reversal, albeit a remote one.

Late start, selling in the grains

Due to a poor night's sleep, I began the trading day quite late today. Grains across the board are in selling mode early in the trading session. The chart at right is wheat as it approaches its lock limit down price less than 1 hour into the trading day. The burgundy-colored horizontal line at the bottom of the price chart is wheat's lock limit down price for the day.

Soybeans is also down significantly today. The second chart is soybeans. It has shown some weakness over the past few days after parabolic price rises early last week. This is fairly typical, and prices had felt somewhat overbought for a few days. The uptrend in soybeans remains intact, but there is a bearish divergence that has formed on the daily chart in the Klinger volume indicator.