Crude Collapses Again

Another vigorous sell-off of crude oil could be a contributor to the rally in the past hours for stocks. This is beginning to feel like a temporary top for crude oil.

Dow Rally Loses Momentum

This chart shows the Dow rally over the past 45 minutes. It is beginning to lose momentum. On the 3-minute chart, prices have shown signs of stalling at the Upper Bollinger Band. I won't short it until I see a lower low and a lower high -- signs of a renewed downtrend in the market.

More Ouch for Stock Futures

Yesterday's closing price is shown as the red line at the top. Until America deals with its energy shortage and accepts responsibility for creating its own energy supplies, stocks will have a difficult time sustaining a long-term rally.

Treasuries Trapped

Treasuries appear to be trapped in recent days within a fairly tight trading range, according to this daily chart. Note how contained prices remain within the Bollinger Bands in the chart of the 10-year treasuries.

Ugly Uptrend for My Gas Tank!

After a very rapid rise over the past several weeks and months, crude oil prices have dropped somewhat today following a new record price over $135/barrel overnight. Is this a top? This daily chart certainly doesn't show it, but personally, I hope so. This price rise has been too parabolic to be healthy for any futures market. A strong correction is needed! It might even teach a good lesson to some long-only energy futures market participants.

Trading Dow Fractals

Here is a chart showing various fractals in a Dow uptrend today lasting about 40 minutes. As fractals move higher less and less, I anticipate the likelihood of a reversal. I also expect reversals at previous resistance points (today, at around 12,650) I usually won't short the market until the second down fractal in a row, perhaps following a short consolidation period. As I mentioned a few days ago in my fractal-related posting, I consider these to be add-on or entry points. I usually require my trade to be profitable to the point where, if the market reversed, I could still exit with a profit, before I will add to my position.

Grains Collapse with Crude Oil

Soybeans -- Is This a Pre-Holiday Sell-Off?
Corn -- Crude-Related?
Wheat -- The Bottom Drops Out

There is NO Commodity Bubble!

There seems to be an inaccurate perception that there is a commodity bubble, and that nearly all commodities are at record prices. This is not the case, and the charts will prove it. The charts don't lie, and while anyone can argue with my reasoning, they can't argue with the true picture that the charts depict.

Exception - Energy-Related Commodities
Generally speaking, only the energy-related commodities are near record high prices. Energy-related commodities (including corn and soybeans -- biofuels) are the only exception to my argument that there is no bubble. Even biofuel grains, it could be argued, aren't in bubble territory. While they are near all-time highs, prices for corn and soybeans have been flat for weeks! The biofuel bubble is solely the fault of Congress because of their idiotic ethanol mandates and the consequential impact on food prices. Let's hold them responsible for food inflation. It is at their feet that the blame justly lies. Most other commodities are well off their record-setting prices from the early part of this year.

The Price of Sugar is Sweet -- for Consumers!

One example of this is sugar (see the daily chart below). Even though sugar is considered to be a biofuel commodity, sugar prices have fallen 35% from their most recent highs. Sugar is trading below both its 50-day and 200-day moving averages (shown in blue and magenta on this daily chart)! And as can be seen from this chart, it's not even close! That's significant -- sugar is well BELOW the 200-day moving average! That is hardly a bull market bubble! That is a confirmed downtrend!

Wheat Dropped Like a Rock!
Wheat is also trading 41% lower than its record high from just a few months ago (below). A huge 41% drop! That is also a confirmed downtrend. It is also trading below both its 50-day and 200-day moving averages, and closed today at the lowest price in six months. As recently as last week, volume indicators suggested a possible bottom for wheat. It hovered around its 200-day moving average for a couple of weeks, but in the past few days, it has dropped below the 200-day moving average. One can only wonder how far the price of wheat will fall!

Other Commodities Also Broadly Lower

Most of the soft commodities are likewise currently trading well off their highs, and within a relatively narrow range of prices. Coffee and cotton prices have been either trending down or flat over the past few months. Orange juice is also in a confirmed downtrend, with prices at their lowest in 12 years; this is surprising given the devastation of the hurricanes 3 years ago, but the charts don't lie. Cocoa is higher, but well off its highs and trading relatively flat in recent days and weeks. Nickel prices are at their lowest in two years, and most other industrial metals are flat to weak. Contrary to the erroneous perception, most commodities are generally trading well within established historical prices and are neither overbought nor in bubble territory.

Before the soft commodities began to trade electronically slightly more than one year ago, the charts were much more erratic and looked like radio static. Now that electronic trading has brought much-needed liquidity to the soft commodity markets, the charts trade much more like smooth sine waves. Many of these soft commodities have now become a joy to trade compared with how they used to be. The beginning of electronic trading has brought much-needed liquidity to the markets. But there is one thing it hasn't brought -- higher prices!

There is no commodity bubble!

Tumbling Treasuries

It appears that with a Fed that, based upon FOMC minutes yesterday, has clearly signaled that they have stopped cutting rates, the best bet now in futures may be to sell treasuries as interest rates begin to rise. This appears to be borne out by the markets this morning, as treasuries are being sold and one one of the solid market movers today. Go where the movement is! That is one of my mottoes.

Treasuries are one of my favorite instruments to trade because they are among the most liquid of all futures and the margin requirements are modest. Treasury futures have margin requirements that are roughly 1/4 those of stock index futures. I can therefore take a larger position in treasury futures than I would ever dream of doing with stock futures.

Execution, Execution, Execution
I am told that the three rules of real estate are location, location, and location. In futures trading, execution is the first law of success. This requires deep, constant liquidity for a trading instrument.

The combined open interest for treasury futures outnumbers the open interest for even the stock index futures. Prices for treasuries also tend to move more gradually than other futures. While I might take 10-20 trades each day for soybeans, I might make only 5-10 trades for treasuries, even though treasury futures trade 3-4 hours longer each day than grains. These factors make treasuries easy to get excellent executions, superb and accurate fills, and to enter and exit easily and quickly. Treasuries are also a good way for new traders to cut their teeth because the charts tend to move more slowly and gradually. They are good for practicing their trading skills.

In contrast, I haven't traded energy futures over the past year (despite the obviously good returns for energy traders who are long) because while crude oil futures are very liquid, they tend to print so rapidly across the screen that I am unable to get good executions at the proper prices for my methodology. Just watching the crude oil futures print across the screen can often be a dizzying exercise. Thus, I stay away from crude oil and other energy futures.

I also tend to stay away from grain futures in the first 5-10 minutes of the day trading session because they move too quickly for me to get accurate executions. I will usually wait for a slightly more subdued market in which trading conditions are more sedate and I can get good executions under more stable conditions.

Tick Bar Adjustments
Likewise, I have found that the Russell 2000 futures, which I used to trade exclusively at one time, tend to print too rapidly for me to be able to get good executions. Even adjusting the number of ticks in a bar for the Russell 2000, I haven't been able to find one that looks clean on the charts. I prefer to trade the Dow mini because the charts tend to trade more cleanly with less market noise. Market noise is, in my humble opinion, deadly for small traders like me. It will drive prices through stops and convince traders to exit prematurely with losses, often just before the market makes a spasm back in the other direction that would have resulted in a profit. I always look for clean charts, and will occasionally adjust my tick bars until they look clean. Only then will I trade them. Anything else has too much market noise. And as I said, market noise is deadly.

Oil Reaches $135

Good Grief! Oil rose more than $4 yesterday alone!

Interesting that Warren Buffett stated today in Europe that he personally doesn't believe that speculation is driving the price of oil higher, but that the high cost of oil is being driven by classic demand and supply concerns.

Crude Reaches $134

After-hours trading continues to drive crude oil prices to $134/barrel, up more than $4 today alone!

Stocks Don't Like FOMC Minutes

The picture is worth a thousand words.

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!