Corn Reaches Limit Up, Backs Off

Corn has now surpassed the $7/bushel handle for the first time ever, and prices has reached the daily lock limit price. corn

Grains Rocket HIgher At Start

The entire grain complex has rocketed strongly higher out of the starting gate this morning. Corn has reached yet another all-time high price just under $7/bushel.

New Records for Corn

Corn has set two new records today. Corn has closed at a new record high of $6.7325, and has set a new all-time record high ($6.7375) in the closing moments of trading as well. This is probably bullish for a continuation of the bull trend in corn.

Stocks See Saw Higher

The stock indexes today are on a steady see saw trade higher and higher. Note that there are six consecutive profitable trades in both directions.

Jobs: More Malarkey from CNBC

Correcting the erroneous spin spread by Steve Liesman of CNBC following last Friday's terrible NFP jobs report, John Mauldin wrote the following this past weekend:

There are two unemployment surveys. One is for businesses, called the establishment survey, and for whatever reason that is the one most people pay attention to. When they do the household survey, they found that the number of employed people fell by 617,000 last month, spiking the unemployment rate to 5.5%. Some on CNBC said it was just teenage unemployment showing up in the numbers, but that is not true. Teens... accounted for just 0.2% of the rise. Adult unemployment rose to 4.8% and accounted for 0.3% of the rise. (By the way, technically, for the three people with no social life actually watching the scorecards, the household survey dropped 250,000 jobs; but after you adjust for factors in the establishment survey and seasonally adjust, you get 617,000.)

Here is another:

Wages declined by 0.2 in April in nominal terms, and forget about it in real, after inflation numbers. David Rosenberg of Merrill Lynch notes that the 0.2% decline in real spending on durables and semi-durables was the 6th decline in a row, which has never happened in the 49 years that such data has been tracked.

Read the newsletter in its entirety here:

When Bubbles Collide

So what's the truth? Did Liesman get it wrong? Based upon tax records from States and the Federal Government, people are earning less and tax receipts by the States are falling significantly, suggesting lower employment and thus, fewer receipts by the States from income taxes. "In short, wherever you look, tax receipts are down. That means income and sales are down. There is no spin that trumps tax receipts," Mauldin says.

Fantasy Inflation

Here is a short excerpt from a recent blog posting by Bill Gross of Pimco, the world's largest bond holder:

The U.S. seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners' equivalent rent, and 3) geometric weighting/product substitution. The changes in all three areas have favored lower U.S. inflation and have taken place over the past 25 years, the first occurring in 1983 with the BLS decision to modify the cost of housing. It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world – a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners' equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made.

In the 1990s the U.S. CPI was subjected to three additional changes that have not been adopted to the same degree (or at all) by other countries, each of which resulted in downward adjustments to our annual inflation rate. Product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives: more hamburger/less filet mignon when beef prices were rising, for example. In turn, hedonic quality adjustments accelerated in the late 1990s paving the way for huge price declines in the cost of computers and other durables. As your new model MAC or PC was going up in price by a hundred bucks or so, it was actually going down according to CPI calculations because it was twice as powerful. Hmmmmm? Bet your wallet didn't really feel as good as the BLS did.

You can read the rest of Bill's thoughts, which were part of John Mauldin's latest newsletter, at this location:

Fooling With Inflation

Atrocious Treasuries

Treasury futures are trading just as erratically as the grains in early trading today. This chart is almost impossible to trade. Treasuries showed a short-term sell-off last night following hawkish comments from Fed speakers. However, today, treasuries are so erratic that trying to trade them is a nightmare.

Grains Open Very Erratic

The grains are trading so erratically, I'm going to leave them until things settle down. Trying to trade during such conditions are a certain way to lose money.

Russia's Oil Chief Predicts $250 Oil Next Year

"We think it will reach $250 per barrel in the foreseeable future," Chief Executive Alexei Miller told news media people earlier today. That's more than $110 higher than today's price.

USDA Sees Corn Production Falling!

The USDA crop progress report this morning indicates that corn production in the United States this year has been slashed the forecast by 70 million bushels to the lowest since 1995. I expect that this will likely result in sharply higher corn prices when the market opens this morning.

Saudis Open the Spigots a Little Wider

The Saudi Oil Ministry has announced that they will open the oil spigot and increase production. Consequently, crude oil prices are moving lower from highs earlier this morning that were only $1 from a new record high.

Oil On the Rise Again

Oil is already over $138/barrel, and still rising today, having erased all the lower prices from oil's swoon yesterday. This is beginning to show some signs of a consolidation pattern. However, oil is consolidating at a price that is far to high! At this price, it could kill economic growth. It is certainly killing the stock futures this morning!

Fed Hawks Talk UP the Dollar

The gyrations in the currency markets lately have turned into a game of tit-for-tat between the heads of the European (ECB) and American (the Fed) Central Banks. You'd think they were are war with each other, seeking for the dominance of their own central bank and for the title of the world reserve currency for their respective currency. Play nice, guys!

Last night, Chairman Bernanke, for the second time in a few days, has talked up the US Dollar, and the currency has risen and responded. This is a stunning development, since in the past, anytime Chairman Bernanke was asked about the influence of slashing rates on the devaluation of the Dollar, he refused to comment, saying that the Dollar was the realm of the US Treasury Department and Secretary Paulson. So what changed that Mr. Bernanke reversed himself and has started to verbally intervene to defend the Dollar? It is because the Dollar's collapse has become so precarious that it is igniting uncontrolled inflation!

Why It's Nuts to Suggest Speculators Are Taking Delivery to Hoard Oil

Here is my response to someone in a forum that claimed that the Investment Banks are taking physical delivery of crude oil and hoarding it away somewhere:

I figured that some uninformed person would CLAIM that large spec funds are taking physical delivery of oil and just hoarding it somewhere. Of course they COULD take physical delivery of oil, but the question is: Would it be a prudent use of their clients funds to do so? And when you examine the ramifications and expense of doing so, the answer is a quick and resounding, "NO"! It is silly idea without fact or foundation for many reasons:

1) To take physical delivery, a speculator would no longer be able to use a leveraged margin account. Instead of putting up $6000 per contract, they would have to fork over $139,000 per contract at today's price. For an IB to take physical delivery of 1000 contracts, they must now fork over $139 million to pay the cash delivery price.
2) They now must find a place to store it. If Goldman Sachs has taken physical delivery of 1000 contracts, they now must find a place to store 42 million gallons of crude oil. You don't just store 42 million gallons under your bed mattress! It would be easier to just leave the oil where it is in the earth and store it there than to take physical delivery. Eventually -- and very quickly -- you would run out of storage room. At 42,000 gallons per contract, the bed mattress fills up very rapidly! Why not just BUY the oil field? It would make a lot more sense -- and cents! There would be no storage cost, and no one could accuse you of hoarding, if you just buy the oil field and sit on it!
3) Now that they have taken physical delivery, they now have purchased -- at a cash price -- an asset that no longer earns a return. It just sits there. It doesn't earn interest or a dividend. It will only provide a return when it is eventually sold. It's dead money! What kind of silly investment is that?
4) They must arrange not only for physical storage, but also transport of those 42 million gallons of oil. How many tanker trucks is that? The cost would be astronomical, especially at today's gas price, just to find enough trucks and truckers to transport 42 million gallons of highly flammable liquid to a secret hiding place.
5) Now you have to pay the astronomical cost of securing such a facility against both thieves and those who would destroy your oil. This is an on-going expense that mounts day after day regardless of whether you ever make a penny of return on your investment. Again, it is both a bad investment and a silly idea. The oil suddenly becomes and expense, rather than an asset that earns a return.
6) Where on earth are they hiding such astronomical volumes of this hoarded oil? Like I mentioned before, you can't really hide such huge volumes of a substance like oil just to hide it and hoard it from the world? Show me where all these millions of barrels of oil are all being hidden. Show me the oil! You can't hide millions of barrels of oil under your mattress or in a bank deposit box! You would have a hard time finding it (about like finding weapons of mass destruction in Iraq) because it doesn't exist. Prove all this hoarded oil exists by showing me where it is!
Note: the only people in the world that have a genuine interest in hoarding oil are the countries that have it and sell it. OPEC has an interest in hoarding it for two reasons. One reason is the reason for which OPEC was created -- to control supply and push prices higher. The second reason -- a new one that has surfaced in the past few years -- is to preserve their oil for their own people's use. In a world where oil reserves are shrinking, more and more oil-producing nations are saying that they want to KEEP their oil for themselves and the future use of their own people! I can't say that I blame them!
7) Now, you must may millions of dollars a month of rent out of pocket each month for storage costs just to sit on an asset that draws no return at all. Oil does no good to its owner unless it is refined and sold for a profit.
8) It would be a much better decision for a speculator to take their profits on their futures contract by shorting the market before taking delivery. Of course, doing this nullifies the long-only argument that uninformed people try to make to suggest that speculators are manipulating the market, for the reasons I explained in my previous post.

No reasonable investor would assume the costs and the risks of taking physical possession of millions of gallons of oil just to sit on it with the hopes of selling it later at a higher price. I don't think the Investment Banks are that stupid. The question is, are we stupid enough to buy such a silly argument?

Betcha Can't Guess...

what this chart is for.

This is the daily chart for one of the stronger bull runs of any futures contract. Note, however, that the Klinger Volume indicator in the second panel is showing heavy selling of late.

Would you be surprised to learn that this chart is for the Mexican Peso, beginning in early March of this year? It hurts to admit that even the Mexican Peso is gaining against the US Dollar in recent history.

Grain Prices Mirror Oil Today

Shrugging off weather-related fundamentals, the grains appear to be taking their lead for prices from the price action of crude oil today. The Dollar appears to have found some support, also, which might also be a factor.

Surprise -- Grains Open Flat to Down

All the morning commentaries I've read this morning have been expecting grains to open sharply higher across the board, but instead, they have opened flat to down this morning. Cold, wet weather and flooding across much of the grain belt is increasing the likelihood of a disappointing harvest. The commodity markets never cease to provide unexpected surprises! The charts show the 15 minute versions of corn (left), soybeans (center), and wheat (right).

Corn Higher By 20 Cents to Another Record

In early evening trading, corn has already risen to 2/3 of the entire daily lock limit amount. Note in the left chart (daily) that corn has already broken out above the Bollinger Bands, an powerful indication of new uptrend. It is higher 6 of the past 7 days. Note also that tonight, corn opened nearly 20 cents higher, and has moved only higher since then.

Interestingly, both soybeans and wheat are also higher this evening by about the same amount -- 20 cents. However, only corn is within easy striking distance of reaching the lock limit price.

Speculators Not Causing Crude Rally

This is my commentary on an article on Marketwatch.com today:

This run-up in prices today is the risk premium due to threat of DISRUPTION of the SUPPLY without any compensating DECREASE in DEMAND! This is still proof that it is supply and demand that is driving the market. Sorry to disappoint you. Fortunately, the "buy the rumor, sell the fact" will probably come into play once the Israeli threat to Iran passes. Then, perhaps prices will come back down somewhat.

Speculators in the market represent only 20-25% of futures trades, according to CFTC data. Furthermore, at any given time, speculative traders are evenly divided between longs and shorts. To suggest that only 10-12% of the market participants have that much control is neither realistic nor factual.

So Who IS driving this rampage today?

Commercials, who take physical delivery, represent 75-80% of NYMEX trades. They take physical delivery. These are the ONLY true long-only participants in the market. Thus, they have greatest influence on prices. They are also the market participants who represent OUR demand for oil as they hedge to obtain guaranteed prices (hence the contract) in an environment of a potentially catastrophic risk to supply. In other words, they are US!

Even large speculative funds MUST eventually sell the market in order to avoid taking physical delivery. They HAVE to; they have no choice. Thus, every long trade requires an off-setting short trade. Again, they have no choice. They MUST short the market. If speculative funds were the driving force behind higher prices, then prices would plummet near expiration as the specs ran for the exits to avoid delivery requirements at contract expiration. This is proof that the specs don't drive prices higher, despite our desire to be tantalized into blaming an easy target. If anything, their influence is a moderating one that would drive prices DOWN. In fact, CFTC data in the past few days has shown that this was a short-covering rally, as speculative shorts were forced to buy to off-set their short trades. We must keep in mind that it was these speculative shorts who drove prices DOWN over the past two weeks. If they hadn't shorted the market over the past few weeks, prices would have continued going higher and higher! We probably would have already hit $150/barrel for oil. We should be thanking them, not cursing them!

The only market participants that can avoid this off-setting short trade are the "commercials", who buy to take physical delivery. Only they can take a long position and NEVER off-set it with a short trade. This has an influence that forces prices inevitably higher.

By limiting participation of speculative traders in the futures markets, we would be literally fueling the very fires that we seek to quell. This is because we would limit the anti-long (short) influence of speculative traders. We would also limit the market to participants who are the ONLY ones who can ALWAYS be long -- the commercials. This would empower the LONG-ONLY commercials, consolidating even greater control in the hands of the very big, and very few commercials. Thus, prices would HAVE to go higher.

The only TRUE solution, of course, is to increase domestic supply of our energy needs so that risks to disruption of global demand don't impact the supply, and thus, the price of oil. Unfortunately, I see little political will to deal with this in Washington. It is just too easy to point fingers of blame elsewhere.

We need to be careful what we wish for. We'll be much worse off if we get it!

Crude Oil May Hit $10 Limit Today

While prices are still almost $2 from it, traders need to keep in mind that crude oil does have a lock limit of $10, up or down. In my time in trading, it has never been reached. However, the two-day run-up in prices is so severe that it is possible crude could reach its lock limit price. We are currently trading over $136/barrel.

From the NYMEX website:

Maximum Daily Price Fluctuation

$10.00 per barrel ($10,000 per contract) for all months. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by $10.00 per barrel in either direction. If another halt were triggered, the market would continue to be expanded by $10.00 per barrel in either direction after each successive five-minute trading halt. There will be no maximum price fluctuation limits during any one trading session.

Corn Sets New Record High

Corn has also achieved a fresh new all-time high price today at 6.63 1/4.

"It's all about the weather. People have had to replant fields a third time and it's completely unknown how the flooding is going to affect yields," said Elaine Kub, analyst with DTN in Omaha.

Fresh New High for Crude Oil

Crude oil has reached a fresh new all-time high price above $135/barrel. This is an increase of more than $13.50 in two days. My guess is that this will contribute to a fresh round of selling in the equity markets.

Three Waves of Market Reaction

In this chart, we see clearly the three waves of market reaction to surprise shocks in the world of finance. I am referring to three waves of orders flowing through the futures exchanges, not Elliott Waves. I have marked each wave near its end above.

Elliott Wave Theory

There are also larger waves on higher time frames. While I am not an adherent to Elliott Wave Theory, I acknowledge that it may have some validity. It certainly has many devotees. I have a an excellent book on the subject that was graciously gifted to me by the author. However, it is so incredibly complex (waves within waves, etc.), and so subject to interpretation, that it tends to be more art than science, in my opinion. It also takes very practiced practitioner to be good at it. The waves I am referring to in this chart are not Elliott Waves.

Three Waves of Orders

Phantom of the Pits refers to three waves in his book, Phantom's Gift. This chart shows three waves of selling today as different market participants reacted to the various data.

1. Wave #1 occurred today when the data was released and traders responded immediately to the data. This wave often occurs as professionals, and especially floor traders, react immediately to breaking news.
   
2. Wave #2 in this chart occurred when the stock market opened and investors were able to respond to the data. This wave also often occurs as orders flow into the pits from those who have belatedly heard about the recent news.
   
3. Wave #3 occurred in this chart when retail investors (the general public) began to catch wind of market sentiment and began to react. Often, this will occur when brokers call their clients and make recommendations. These retail investors will then respond to market sentiment based upon their agreement or disagreement with brokers. This wave often occurs when the public hears of the recent news, and is often the strongest wave.
   

Note that often, wave #3 occurs just at or near the market apex or, in this case, the nadir of the market's reaction to news. Sadly for most retail investors, it is often the turning point of the market.

Phantom of the Pits refers to the three waves in his book, Phantom's Gift, but doesn't explain in great detail. He does say that the safest and most reliable place to enter the market is at the earliest stages of wave #2. He also implies taking profits on wave #3 and positioning against the public by fading the market in wave #3, which is when volume is the strongest but will soon lose steam. This may seem like a contradiction, but it's not. The third wave, while strong and often causing new highs or lows, is also the thinnest. This is the best time to prepare for a counter-trend move or reversal. I'm not familiar with any books on the subject of this phenomenon of the three waves of orders, except Phantom's Gift. If you do, please contact me by writing a comment attached to one of my posts in my other blog. Thanks!

Investors Flood Back to Treasuries

Meanwhile, investors are rushing for the equity exits. They are rampaging back into treasuries as a safe haven.

Rogers Commodity Index Gaps Higher

Even the broader Rogers Commodity Index futures have gapped forcefully higher today. This index is much broader than the GSCI, and contains less energy futures. It demonstrates that the Dollar's plunge is sending all commodity prices much higher!

Gold, Too, Goes Parabolic

Dow Drops Nearly 300 Points!

Grains All Firmly Higher

Corn (left), soybeans (middle), and wheat (right) are all strongly higher today. By this fall, we may be seeing shortages, and we will almost certainly be seeing higher prices!

Oil: $12+ Rise in Two Days!

Crude oil prices have risen so fast in less than two days that we have now reached levels only $1 from the all-time high of $135/barrel.

Every time we fill up at the gas tank, we need to remember that both Barack Obama and John McCain are devout believers in the global warming religion. Is this the value system we want in the White House? If so, $4 gasoline will soon be $8 gasoline!

STAGFLATION!

Lead by crude oil, commodity prices have exploded today. And we haven't even heard of any threat to the Gulf of Mexico oil fields due to a hurricane yet!

How ironic that this whole round of inflation was ignited by Jean-Claude Trichet's threats to raise interest rates to combat inflation! The chart here is the daily and 4 hr charts for the Goldman Sachs Commodity Index futures. Note the immense gap upward today on both time frames! This is not a common phenomenon in futures.

Meanwhile the shock of higher unemployment has sent stock indexes into a tailspin. This, in turn, is sending investors back into treasuries and forcing interest rates lower, which is pummeling the value of the U.S. Dollar (see chart above). And the falling Dollar is raising the fear of inflation even more. What a vicious circle!

Stagnating economy + high inflation = stagflation

Unemployment Rises to 5.5%

The U.S. unemployment rate has risen a surprising .5% in one month.

The combination of crude oil prices and unemployment rate is pummeling stock index futures this morning.

Morgan Stanley: $150 Oil by July 4th

Morgan Stanley is predicting crude oil at $150 in less than 30 days! That's going to hurt!

Crude Oil Rockets $10 in Two Days

Crude Oil has risen from $121.61 at 9:30 pm EST Wednesday night to $131.56 this morning, just five cents shy of $10.

Stocks Recover, Go Higher!

I am surprised, but the stock indexes have not only recovered from the latest crude oil shock, but moved higher still! What a day! Long again, friends!

Crude Oil Can't Be Contained

It's no wonder stocks have plunged! Crude oil has take off again! Crude oil is crashing the stock rally party today! After holding support well above $120, crude oil bulls have stampeded higher again. Crude oil has surged $6 today alone!

This may have also fueled the fire of higher corn and soybean prices, since the two seem to follow crude oil when it moves higher! They're fuel after all, not food, anymore! This bull trend could really gather steam if poor crop weather continues to fuel corn and soybeans higher while the threat of a hurricane adds moment to record crude oil prices!

It could get ugly!

Go Short, Young Man!

As a trader, I really don't care what direction the market goes. I'll just go with it! The whole idea is to go with the flow. After a nice long trade with the bull run, now the bears are in charge. I'm with you!

Corn, Soybeans Approach Limits

The blue lines above are lock limits. The dotted blue lines at the bottom are yesterday's close.

Corn - may reach lock limit

Soybeans

Shooting for 200 on the Dow

I was hoping we'd make 200 points on the Dow today, but now that the stock indexes have begun to manifest some weakness, it looks like we might not make it with 2 hours left on the day. This has been a good day for trading both stocks and grains. What a bull run!

New Record High for Corn

Corn has reached a new all-time record high today over $6.40/bushel. As expected, corn and soybeans have begun what may be a new bull market, largely due to weather-related growing conditions. Cool, wet weather is to blame. Food prices will probably rise as a result. Perhaps even shortages could be on the horizon.

Weather Front and Center

I have growing concerns that the grain-growing regions of the United States are too wet. This daily chart for soybeans shows a Bollinger Band break-out yesterday, a key sign of a bullish trend, following two months in a tight trading range. Cool spring weather and wet, rainy conditions are beginning to increase sentiment that a bull market in grains may be starting to build. We are now at a crossroads where it is almost too late to plant some crops, and others are showing signs of the seeds (already in the ground) rotting, requiring replanting or giving up on this season. Even with the resurgence of the Dollar, poor weather may outweigh the strength of the Dollar and push grain prices into a new bull trend.

What Happened to Reports of High (or Should I Say "Low") Rice Prices?

The price of rice, like many commodities, has collapsed in recent weeks. Prices for rough rice futures have declined about 25% since mid-April. Those who try to blame traders for the high price of food commodities tend to ignore the fact that very little rice is traded in futures. There are so many different varieties of rice that there are very few rice futures. How then can speculative traders be blamed for the price of rice?

This chart is for rough rice traded on the CME, which is the most liquid rice futures contract in the world. It has open interest of only about 6,800 contracts for the July 08 contract. It is so thinly traded that I won't even touch it! Contrast that with an average of between 500,000 and 600,000 contracts of open interest for the July 08 corn contract. That's 100 times as much! And yet the price of corn has been dead flat for two months!

As can be easily seen in this daily chart, rice is in a downtrend! This is no mere correction, as with crude oil. This is a confirmed downtrend! Why doesn't the media report this fact? When was the last news media report that talked about the 25% decline in rice prices in the past 45 days?

Eurodollar Futures Also Highly Liquid

This chart for the daily Eurodollar futures is also extremely liquid, often with more than 1.5 million contracts of Open Interest. The margin requirements are fairly low, being roughly comparable to the treasury futures. I know very little about the Eurodollar, but watch its movements nevertheless. It apparently represents the interest rates paid by banks on CD's outside the United States on US Dollar deposits. It tends to mirror the activity of the LIBOR futures, but is much more liquid than LIBOR. I am also hoping that there will eventually be an ETF to trade the Eurodollar (not the Euro or EURUSD Forex) futures. The Eurodollar is an interest rate futures vehicle, not a currency trade. Here is what the CME website says about the Eurodollar:

The Eurodollar futures contract is the most widely traded and versatile interest rate futures product in the world. It provides a valuable, cost-effective tool for hedging interest rate fluctuations on Eurodollars – U.S. dollars deposited in commercial banks outside the United States. Eurodollar deposits play a major role in the international capital market, and have long served as a benchmark interest rate for corporate funding.

Dow Plunges Back to Negative Territory

Wow! What a day to trade. The Dow futures have now relinquished all their gains for the entire day and are in the red for the moment. This has occurred in reaction to Fed Chairman Bernanke's speech this afternoon at Harvard University. I have noticed that the stock markets usually do not reaction very positively to the Fed Chairman's speeches. The S&P 500 also have give up its gains. However, the NASDAQ and S&P Mid-Cap futures are still in the black for the day.

Another Confirmed Correction or Downtrend

This daily chart (above) is a futures vehicle that I discovered a few weeks ago and have been following. It is the Rogers International TRAKRS futures. Like the GSCI (Goldman Sachs Commodity Index) futures, it tracks a broad index of 35 commodity futures balanced in energy, agriculture, and metals. However, unlike the GSCI futures, the Rogers TRAKRS futures are quite liquid, having Open Interest of more than 250,000 contracts. That's very liquid! There are probably fewer than a dozen commodity futures that have that volume of liquidity. Hence, it may be a good one to trade on the longer-term charts. It also appears to have broader commodity components than its GSCI sister. The GSCI contains 24 futures and is oriented toward the most liquid ones, but is heavily weighted toward energy-related, and especially crude oil (more than 50% of the total index, the last time I checked), commodities. Hence, the GSCI futures (daily chart below), with the collapse in the price of crude oil, show a stronger downward slope at this time, than the Rogers Intl TRAKRS futures. I would like to find an ETF that trades the inverse (ie., takes a short position) of the GSCI, but I am not aware of one at this time. Buying such an ETF would be a good way to short crude oil. (I am aware of the DUG ETF, but DUG shorts oil companies, not the futures.)

Crude Oil Confirmed Correction

As if this were news, crude oil has been in a confirmed correction since May 28th, which is now trading below $123/barrel, more than $12 from its recent high of $135/barrel just two weeks ago. Note the heavy volume-based selling on the Klinger Volume indicator. This may be due to clogged unloading terminals world-wide as tanker ships (being used to store crude oil) rush to port to try to unload their costly cargo. This phenomenon was predicted two weeks ago in John Mauldin's newsletter that I mentioned (and provided a link to) on this blog.

Iranian Government Storing Oil in Tankers?
The Iranian government had parked crude oil off its coasts in tanker ships, renting most of the world's available tanker capacity, in anticipation of yet higher crude oil prices. Very astute! (Strange, however, that they were simultaneously trying to blame speculative oil traders for higher prices while speculating on higher prices themselves at the same time with this stunt. I think the word for this is hypocrisy.) When prices collapsed due to free market forces, while they were paying about $100,000 per month, per tanker, to store crude oil, Mauldin predicted that they would all rush to port immediately to try to dump their cargo at the best available price, potentially causing a (temporary) glut of crude oil and a resulting collapse in prices. This chart confirms a correction in the price of crude oil. I consider this a correction, not a downtrend. In other words, it is likely to be only temporary. I have no idea how low it will last, but I expect it to be temporary. May it last a long time!

Divergences Form, Prices Collapse

Look at the divergences that formed on these charts. They are depicted in these two charts as heavy red downward-sloping lines in the 2nd and 4th panels of both time frames shown here. The 2nd panel shows bearish divergences on the Klinger Volume indicator, and the 4th panel shows divergences on the MACD. Prices have subsequently collapsed on the Dow! Interestingly, however, while prices have collapsed on the S&P 500 Index and Dow futures, prices have only consolidated on the NASDAQ and S&P 400 Mid-Cap futures. The Dow tends to closely mirror the S&P 500, while the NASDAQ and S&P Mid-Cap also tend to mirror each other. Each of them tend to have distinctive characteristics of their own.

Tick Charts Have Different Values

If you examine the charts closely, readers will also see that I use different tick values on the tick charts for each of them. I do this, adjusting each one from time to time, until the charts become more orderly and smooth. Today, I am using 100 tick charts for the Dow, 50 tick charts for the S&P Mid-Cap, 150 tick charts for the NASDAQ, and 250 tick charts for the S&P 500. For some reason, the S&P 500 is the most difficult to find adjustments that result in smooth charts, even though it is by far the most liquid of the stock index futures. I suspect that this may be because the S&P 500 has more trading activity by amateurs, but I really have no proof or evidence for this opinion. I just know that there is more erratic price behavior (market noise) for the S&P 500 futures. These tick values may all change tomorrow. I examine and adjust them constantly, sometimes more than once a day.

Hints Toward Higher Stocks

I will often look at other stock index futures for hints of what my trades will do. Here are two. Based upon what these two charts are doing, what would you expect the Dow futures to do? My instinct (bias) for stocks to reverse downward, as I mentioned in my last post, may have been mistaken.

Divergences May Form
However, if prices on these two indexes move only slightly higher, then divergences are likely to form on some indicators, suggesting bearish reversals. Divergences on the Klinger Volume indicators, MACD, or Bollinger Squeeze indicators, are signs of waning momentum and eventual reversal. Astute traders are always looking for them. In the futures markets, it take much more capital to push prices higher, while it only takes a lack of new buying interest for prices to collapse and head lower. I believe I learned this from reading John Mauldin's free weekly newsletter. (This fact also suggests that speculators don't have the power to send prices higher, as suggested by those who would blame traders for higher commodity prices. They ascribe to us too much -- undeserved -- credit. )

S&P 400 Mid-Cap futures

The CME is eliminating the Russell 2000 Index futures following the Sept 08 contract. They are recommending that traders switch to the S&P 400 Mid-Cap or a few others mentioned on the CME website, alternatives to the Russell 2000 futures.

NASDAQ Index futures

Dow Bounces

As explained in my last post, the Dow has found support at the EMA on the 15 minute chart (far left) and the Lower Bollinger Band on the 3 minute chart. It remains to be seen if this will result in a resumption of the Dow uptrend, or a temporary consolidation, most likely to be followed by a downturn. If the bulls can't push prices substantially higher (than the previous high), then a downtrend is likely to result. My gut tells me that prices will most likely consolidate for a time and then move lower, but I am trying to be unbiased in this regard. That way, I can be open to whatever market forces are trying to tell me. Exciting stuff!

Shorted Dow

My last post mentioned conditions under which I would short the Dow, which have now manifested themselves. However, prices are close to the 15 minute EMA (left chart), so I am anticipating that prices will find support near here, at least temporarily. If prices move through that EMA and remain below the previous highs, I will plan to go short again. This conflict will probably result in consolidation in this range until this conflict is resolved by either the bulls or the bears. This is hinted at on the tick chart (right) as well as potential dynamic support by the Bollinger Bands on the 3 minute chart (middle). This would be a likely place for prices to rebound higher to resume today's uptrend, or to merely consolidate.

From my experience, however, one never knows which side will win out. With all the worry troubling the stock markets these last few days, there has been a somewhat bearish sentiment lately, as manifested on the daily charts (not shown). However, with Bernanke's statements yesterday and bullish economic data today, the bulls might very well win out. I must be prepared for anything!

I have noticed that stock index traders tend to have very short memories. Morose sentiment one day often gives way to ecstatic sentiment the next day, resulting in manic-depressive movements in the stock indexes. And that's fine with me, because it provides the momentum, liquidity, and volatility needed for profits in the futures markets.

I will continue to buy and sell based upon Phantom's Rule #1 and Rule #2, using my entry, add-on, and exit points, as long as these charts continue to trade with smooth, clean trading conditions. I suppose that only a trader could view this apparent chaos as a thing of artistic beauty! But to me, that's what they are!

Stocks Solidly, Reliably HIgher Today

Contrast the previous charts in my last post with this intra-day chart of the Dow futures today. It is solidly higher and charts are trading with excellent reliability. Here are the 15 minute and 3 minute charts:
Even the tick chart is smooth and reliable, even when the market shows some downward movement, as in this chart. I won't short this market until at least one higher time frame closes below the Exponential Moving Average and I see at least one fractal with a lower low and a lower high on the tick chart. I will also watch the next two higher time frames (15 and 3 minute) for dynamic support/resistance in the form of the EMA and Bollinger Bands. I'll be waiting for the chance to go short!

Little Gain for Grains

The grains just can't seem to hold their gains today. I am continuing to trade stock index and treasury futures. There is a tremendous amount of conflicting data in the grains today. Oil prices have dropped following the weekly EIA data, which has a bearish impact on corn and soybeans. However, a worsening stand-off in Argentina between farmers and the socialist government, combined with a cool, wet spring in the grain belt of the United States, would continue to build a somewhat more bullish sentiment. Conflict between data, both fundamentally and technically, tend to result in stagnant prices and low volatility. The daily charts for both corn and soybeans reflect this stagnant sentiment. Above is the daily chart for corn, but the soybean one looks quite similar for the past 60 days. Grain prices are stuck within a narrow range trading scheme for now.

Likewise, the intra-day chart (below) for corn is similarly stagnant. Yesterday's settlement price is the dotted white line, and corn is only one cent away from that price for the moment. It's not even worth trading! Wheat and soybean prices are also struggling to maintain any prices gains today, with prices of all three within six cents of the opening price. With a limit of 70 cents for soybeans, this is hardly even noteworthy. I will continue to monitor activity, but trade stock and treasury futures for the time being. Stocks are solidly higher today, but seem unconvincing, so both long and short trades seem to be in order.
Corn Intra-Day

Soybeans Intra-Day -- Very Ugly to Trade!
The lesson here, of course, is that as a trader, it is always wise to seek out the trades that show good activity that shows some semblance of reliability. Trading charts that are erratic and unpredictable can only be destructive of a trader's account. The futures markets have tremendous power to devastate a trader's account if we take the markets too lightly. Do so at your own peril!

Grain Bulls Emerge from Hiding

Surprise: Both Stocks and Treasuries higher!

I am accustomed now to seeing treasuries and stocks move in opposite directions. Imagine my surprise today at seeing that both stock index and treasury futures are modestly higher. Good news on economic data today have pushed stocks higher, while recent interest rate moves above 4% have resulted in the buying of treasuries for yield, especially in light of renewed worries about the financial sector. Ironically, this has pushed yields lower again.

Grains Open Stagnant

Following Fed Chairman Ben Bernanke's statement yesterday that the Fed will now take seriously the devaluation of the Dollar and cease it's interest rate cutting cycle, commodities are moving broadly lower. Talk is, ultimately, just talk. It remains to be seen whether talking the Dollar higher will be seen as supportive of the greenback, but it is certainly welcome news indeed. Now, if we can just get Congress to stop spending...

Grains have opened stagnant this morning, but slightly higher. If the Dollar rebounds with any strength, fund selling of the grains may be the result, possibly sending prices lower. Could a downtrend in grains be the result? It seem hard to believe as long as demand remains strong and cold, wet weather conditions continue into the grain growing season.

WAMU, Wachovia Worry Stocks

Good volatility in stocks today to the downside, as worries in the financial sector once again cause stocks to swoon. More flight to safety is driving down interest rates with heavy buying in the treasuries.

Wet Weather Risks Growing Grains

The grains are universally stronger today, after continuing wet spring weather is starting to worry the market regarding the vitality of this year's grains crops. This chart for corn is representative of the three major grain futures this morning. Corn has rebounded so strongly today that the weakness shown last Friday has completely dissipated. The continued farmer strike and break-down in talks with the government in Argentina are also providing price support for soybeans. Short covering might possibly also be a contributing factor today.