The markets behaved themselves very well this week. In fact, I don’t think we had any losses this week, only winners. Off the top of my head I think we banked about $3500 in profits, and that was trading single contracts.

That’ll help buy a few Christmas presents! LOL!

As promised we’re continuing to make changes at Traders Helping Traders in order to make your trading and learning even more enjoyable.

I’m happy to announce that Shaggy has finished the update site and now all the materials are available to you at

http://www.supportandresistance.com/cgi-bin/discus/discus.cgi.

You’ll want to bookmark this address as this is where you can go to get the weekly ezines, nightly market updates (available at 7 pm EST), downloadable charts and audio commentaries, all in one place for easy access.

This week also kicks off the NEW support and resistance discussion forum at http://www.supportandresistance.com/cgi-bin/webbbs/webbbs_config.pl. You’ll need to register your email address to post at the forum, but this is merely a means to keep irrelevant posts and flame wars from cluttering the forum (it makes it possible to prevent trolls from posting without having to block IP addresses, etc).

The new forum is where Tom and I will be “hangin’ out”, so if you’ve got any support and resistance questions, this is the place to ask them.

More goodies to come very soon….

• Exchange: CBOT
• FND 2/27/04
• LTD 3/12/04
• Option Expire 3/12/04
• Contract Size: 5000 bushels
• Point Value: 1 ct = $50

The market flirted with our short entry ever so briefly last week before continuing higher to complete a rounded bottom formation at 253 ¾ (see all the resistance there?) Last Friday saw prices take a pretty substantial bounce off the neckline of the rounded bottom formation sending prices back to where they began the week: at the 245 ½ support line.

This Week:

Not much has changed for corn this week. In fact, it appears that we may have been a week early with our prediction. Things remain the same for corn this week as we look to short below 245 ½. Once below here it looks pretty good for prices continuing lower for the short term.

As before, consider using the resistance at 247 to limit risk to about $75 per contract. If the market breaks 245 ½ and then reverses on itself hard enough to take out 247 it will probably be a pretty clear sign that the trade is not going to work out as planned.

Profit target remains the previous support at 237 ¾ which would be followed by support at 233. The 237 ¾ target would yield a potential profit of $380 per contract for a RRR of 5:1.

Trade Summary

• Short March Corn below 245 ½
• Exit Order: 247
• Risk Exposure: $75 per contract
• Profit Target: 233 ¾
• Potential Profit: $380 per contract
• RRR: 5:1
• Degree of Risk: Moderate

Click here for the Market Minutes Audio Commentary on Corn

• Exchange: NYBOT
• FND 2/23/04
• LTD 3/09/04
• Option Expire 2/06/04
• Contract Size: 50,000 lbs
• Point Value: 1 point = $5

Well, we certainly called cotton’s direction right last week. Too bad the market gapped limit up – voiding our trade. The market never did quite market the intended target at 7400, getting only as high as the double resistance at 7190 before falling off again.

From here prices tumbled and covered the recent gap before finding support again. This makes me think that we could possibly see another rally this week.

This Week:

Notice how volume and open interest have been declining almost since the beginning of the downtrend? This is usually an indication that the current trend does not have support and therefore is likely not to last. Last Friday’s “bounce” might be the first signal that higher prices will continue this week.

If we can see prices continue above Friday’s high I think we could see a rally at least for the short term. Ideally, entering long above 7190 we should have the exit orders below the 7080 low; however this would leave over $500 at risk – a little expensive to say the least.

You could lessen the risk somewhat by using the closing price at 7149 to hide your exit order behind. In this scenario you would have about $200 per contract at risk. Much better; however we are well within the market’s daily range, so the risk of whipsaw goes up dramatically.

Long term upside target is resistance at 7830, which is still quite a way off. First target should be the resistance at 7390, which managed to hold the market down this week. Potential profits would be in the $1000 per contract neighbourhood. RRR is about 5:1.

Trade Summary

• Long March Cotton above 7190
• Exit Order: 7149
• Risk Exposure: $200 per contract
• Profit Target: 7390
• Potential Profit: $1000 per contract
• RRR: 5:1
• Degree of Risk: HIGH (hey, it is cotton)

Click here for the Market Minutes Audio Commentary on Cotton

• Exchange: CBOT
• FND 2/27/04
• LTD 3/12/04
• Option Expire 2/20/04
• Contract Size: 5000 bushels
• Point Value: 1 cent = $50

Nice little move in beans last week. The market behaved beautifully and allowed us to pick up $900 per contract in a couple of sessions. As expected the market stalled after passing through the resistance barrier and subsequently headed lower. I think we can probably expect more of the same this week.

This Week:

Looking at your RSI indicator, you can see that beans have been building divergence for the last six weeks. This would suggest that the market trend is not to be trusted. Combine this with the completed 123 formation and I think lower prices are very likely for soybeans.

This could actually be the beginnings of a much larger bearish move for soybeans so you may want to consider taking multiple contracts if your account allows it. This would enable you to occasionally bank some profits while allowing other contracts to “run” with a trailing stop.

This is one trade where the targets are a little easier to find than usual. My first downside target would be the previous low, or #2 point, at 733. As you can see there is a bit of support in this area which could cause the market some pause.

This support would be followed by the first retracement line at 688 which would give way to the 50% retracement at 654 ½. Notice how there is support (albeit scattered support) at each retracement level. This helps add credibility to the retracement line as a possible reaction point.

Planning our entry is a little more involved however. Actually the entry is pretty straightforward: we enter short below the 758 low; placing the exit order requires a little more thought.

Ideally the exit order should go above the 771 area. See the multiple hits at 772 and 773? While this would be the ideal, it does leave nearly $700 per contract at risk. Yikes!

Okay, so what’s the alternative? Well, seeing how RSI is already turning down, it might be safe to assume that if prices take out Friday’s low then we should be safe by placing exit orders somewhere above the close. We’ve also got the 5 day moving average hovering in this area, which represents the weekly average, so placing the exit above here would probably be a good idea.

There are 3-ish hits in the 767 area, so this seems like the most logical location for our exit orders. Risk exposure is $450 per contract, which is at the upper end of the comfort scale.

You could tighten risk even more by moving the entry order to below the 761 ¾ low. This would lessen the risk to about $265 per contract and bump the potential profits by an extra $200 as well. Careful, moving the entry closer could increase the chance of a whipsaw because we are no longer making the market “prove itself”, but the lower risk might make it worth the chance.

Potential profit at 733 is $1250 per contract, but as I mentioned earlier, there is possibly a greater downside potential as well. RRR is just shy of 3:1.

Trade Summary

• Short March Soybeans below 758
• Exit Order: 767
• Risk Exposure: $450 per contract
• Profit Target: 733
• Potential Profit: $125
• RRR: 2 ¾:1
• Degree of Risk: HIGH

• Exchange: CME
• FND 2/09/04
• LTD 2/27/04
• Option Expire 2/06/04
• Contract Size: 40,000 lbs
• Point Value: 1 point = $4

Closed out our cattle trade last week as the market found the 9420 target. Prices actually traded through the resistance by almost 75 points before turning around again. This is to be expected however, as the market is trading at all time highs and we don’t have a lot of resistance to base our trades on.

This Week:

The bull trend is weakening, no doubt about it. Notice the divergence we have happening on the RSI indicator? The market is making higher highs; however RSI is not following suit. Classic divergence. This could be an early indication that the trend is losing steam.

Just because we have divergence however, does not mean that we will see a full reversal in trend right away. Bearish prices are coming…but maybe not this week.

In fact, I’m bullish on cattle this week. See the support just below the market at 9115? There’s a bit there, and that could be enough to give the market support and send prices higher.

While we haven’t touched the support just yet, I would expect to see a bounce off 9115 early in the week. Buying long here, I would risk the trade to support at 9075 before pulling the pin.

Careful, this is a very tight trade for a market like cattle. If your account can tolerate the risk you may want to consider using the next support level at 9020 for a $380 risk per contract.

If the market finds support here expect it to try and recapture the contract highs near 9500 but watch out for resistance at 9285 which could spoil things. Potential profit at 9500 would be just over $1500 per contract. RRR is 9:1.

Trade Summary

• Long February Cattle from 9115
• Exit Order: 9075
• Risk Exposure: $160 per contract
• Profit Target: 9500
• Potential Profit: $1540 per contract
• RRR: 9:1
• Degree of Risk: HIGH

Click here for the Market Minutes Audio Commentary on Cattle

• Exchange: NYBOT
• FND 2/13/04
• LTD 3/16/04
• Option Expire 2/06/04
• Contract Size: 10 metric tons
• Point Value: 1 point = $10

This week saw cocoa finally find our target at 1598 to close out our long position with a profit of just over $1500 per contract. Not too shabby. This was pretty much a textbook support and resistance trade right from the start.

I’m still looking for higher prices for cocoa. The market “stalled” at the end of last week which could hint of a pullback, but the long term definitely looks higher.

This Week:

I would be more serious about a short position if we saw a lower closing price last Friday; however given the rather bullish session we saw means the market is still a little undecided.

Volume and open interest have been weak, suggesting that the current trend does not have much strength to it. RSI is also hooking, which could be an indication of a turn in prices and while I would not be too surprised to see a pullback this week I would not expect prices to retreat too far before finding support.

In fact, if prices do decline, look for support, and an excellent buying opportunity, as the market trades near 1500. There is a fair amount of resistance in this area and it may serve to hold the market up.

In the meantime however, I would still be on the lookout for a break above last week’s high as a signal to continue with a long position. Entering above 1623, with exit orders below 1600, would leave about $230 risk per contract.

The immediate upside target would be resistance at 1675; however I don’t think prices will stop there with the resistance at 1730 looking like the ideal target. Potential profits at this level would be just over $1000 per contract, giving a RRR of over 4:1.

This is the back up plan however. Be on the lookout for buying opportunities if prices slip to the 1500 area.

Trade Summary

• Long March Cocoa above 1623
• Exit Order: 1600
• Risk Exposure: $230 per contract
• Profit Target: 1730
• Potential Profit: $1070 per contract
• RRR: 4:1
• Degree of Risk: Moderate to HIGH

Click here for the Market Minutes Audio Commentary on Cocoa

• Exchange: NYBOT
• FND 3/01/04
• LTD 2/27/04
• Option Expire 2/13/04
• Contract Size: 112,000 lbs
• Point Value: 1 point = $11.20

Sugar was another profitable trade last week and another textbook support and resistance trade. If you got into the trade the previous week you would have realized nearly $500 per contract profits. Even if you waited until last week to open your position you still should have been able to make $350 – 400 profit per contract.

Long term I think we will see sugar prices continue higher; however for this week I think we could see a short term pullback.

This Week:

If you go through the history of your chart you can see that there is quite a bit of resistance around the 673 – 675 area. Because of this I think we will see the market pause slightly this week before eventually continuing higher.

I think the pullback will be short lived however. Probably no further than support at 640; therefore I would view this more as a buying opportunity than a selling one.

If we do get our pullback move this week, look for a chance to long the market from support at 640, with exit orders below the support at 625. Risk would be approximately $170 per contract. The more cautious among you may want to wait for a market reaction to the support before you initiate your positions.

If the market behaves as expected, we should see prices find their footing here and resume the bull trend. Next upside target? Well, I’m going to aim high and use the weekly resistance at 710 as my next target. This would give us a potential profit of over $775 per contract. RRR is 4 ½:1.

Trade Summary

• Long March Sugar from 640
• Exit Order: 625
• Risk Exposure: $170 per contract
• Profit Target: 710
• Potential Profit: $775
• RRR: 4 ½:1
• Degree of Risk: Moderate

• Exchange: CME
• FND 3/16/04
• LTD 3/16/04
• Option Expire 3/12/04
• Contract Size 100,000 CD
• 1 point = $10

The Canadian Dollar never did find our long position last week; however about the middle of the week we were able to play a one-day short off the 7650 resistance for a quick $500 profit.

By the end of the week the market continued to struggle with the same resistance line and while the bulls obviously are not going away easily, I am fairly confident we will see lower prices this week.

This Week:

We can actually play a variation of last week’s trade for this week. I would continue to monitor a possible long position if the market can get above the contract highs at 7682. I think the longer term will still see the CD trading around 7835-ish, but probably not this week.

I would suspect that we could see one more test of the 7650 resistance area on Monday. If we get the test this could be a good chance for you to get short this market (if you’re not short already). Exit orders should go above the contract highs at 7682 for about $320 risk.

Downside support is scattered; however I would look to 7515 as my first target. Support isn’t huge here; however the market will have travelled a way and might be due for a bit of a pause/pullback when it trades here, so you might want to consider keeping a tight stop or exiting on target and banking the $1380 per contract.

RRR for the trade is a little better than 4:1.

Trade Summary

• Short March Canadian Dollar 7650
• Exit Order: 7682
• Risk Exposure: $320 per contract
• Profit Target: 7515
• Potential Profit: $1380
• RRR: 4:1
• Degree of Risk: Moderate

Click here for the Market Minutes Audio Commentary on the Canadian $

• Exchange: COMEX
• FND 2/27/04
• LTD 3/29/04
• Option Expire 2/13/04
• Contract Size: 5000 Troy oz
• Point Value: 1 cent = $50

Ooops! Silver was the fly in the ointment this week. I thought we got away without a loss, but it looks as though silver stuck us for about $300. Not too bad, but a loss all the same. Unfortunately things don’t look too much better for this week.

This Week:

Silver has been acting very strange lately. The market fails to give us a good setup and it is once more nearing substantial weekly resistance first at 562 then again at 580. If it wasn’t for the resistance at 562, I would be much more comfortable grabbing the market long above last week’s highs; however I’m not sure of the reaction we’ll get if/when we hit 560.

Besides, the ranges that silver has been making are downright scary when you’re trying to set up a low risk trade. Think we’ll sit this one out for a few days and hope the market calms down a bit before we suggest a trade.

Trade Summary

• Flat March Silver
• Exit Order: N/A
• Risk Exposure: $N/A
• Profit Target: N/A
• Potential Profit: $N/A
• RRR: N/A
• Degree of Risk: N/A

Click here for the Market Minutes Audio Commentary on Silver

So what looks good for this week? Well, almost everything really.

I like the potential of the sugar trade again; however we have to wait for the market to retreat some to take advantage of that one. The Canadian Dollar looks like a high probability trade. If the resistance line holds then prices have to go lower and if it fails, the momentum required to overcome the resistance should propel prices considerably higher.

Corn and cocoa also look like good “prove me right” trades with decent probability of success. Even cotton and cattle which can be wild at times look fairly “safe” this week. In fact, I think I might even take the cattle trade as this week’s pick. it is a little higher risk than some of the other trades; however the amount of money at play is quite small with tremendous upside potential (even at 9285 resistance).

• Long February Cattle from 9115
• Exit Order: 9075
• Risk Exposure: $160 per contract
• Profit Target: 9500
• Potential Profit: $1540 per contract
• RRR: 9:1 Degree of Risk: HIGH

This is neither a solicitation to trade nor a recommendation of any strategy. Always consult your broker or advisor before attempting any trade. Commodity trading involves substantial risk of loss.

What specifically do you look for on weekly and monthly charts for application to the daily charts for the contract months you are trading?

Answer:

I like to consult a longer term chart to give me a better perspective of current prices, especially if the daily price chart is making new highs/lows. Without consulting a longer term chart, you would have no way of knowing if the "new" prices are average for the market or extreme. You would obviously trade an extreme market differently than you would an average priced one. Current examples of extreme markets are cocoa, most of the grains and energies. The more extreme the price in the long term, the more significant the resistance might be in the short term.

Many times the weekly and monthly charts will show resistance at a particular price just like on the daily charts. These resistance points would require consideration when planning your trade on the daily level; as the price has proven to be significant resistance in the past. You can analyze the longer term charts just like daily charts: the more resistance at a specific price level there is, the more exact the resistance is, and the more extreme the resistance is, the "harder" it will be.

The only significant difference between the charts is the time frame, and this is most significant when considering retracements. Retracements on the daily level might occur over a matter of weeks or months, whereas on the weekly chart the retracements of trends could take several months to a year or more, and on the monthly level the retracements will take several years. This is important to remember when you are trying to determine where prices are going.

Many times the longer term charts will also hint to a market's cycle or trends. This is more difficult to analyze and can sometimes be misleading, but some markets, like lumber, make regular market swings that can be seen on a weekly chart.

-Erich

1. Which way is the market heading?

The obvious answer would be down, right? Well, on the surface it looks like the market is in a downtrend, but did you take a look at your long term charts as well? Kudos to you if you did. Looking at the weekly chart we can see that the market has been trading within a larger range for this whole year and it is quickly approaching the bottom of the range.

2. How can you use what you see on the chart, the RSI indicator and the volume indicator to structure a trade with minimal risk?

Looking just at the RSI and Volume indicators for a moment you can see that RSI is at a “test point” and that volume had been increasing steadily while the market was in a channel (November 7 – 14) and that it increased rather strongly on the bearish days (November 20 – 21).

This might lead you to conclude that the market is favouring lower prices. If you turned to the weekly chart you would have realized the problem the market would have had with finding lower prices (the market approaching the bottom of the trading range) and therefore might have changed your mind about a possible short position.

If you decided to take the trade short anyhow, you could have minimized the risk exposure by using the resistance at 6170, which is the bottom of the channel on the DAILY chart. Trying to short the market from the 6095 high (last Friday, November 26) and using the 6170 resistance as a back-stop, you would have had about $300 risk per contract, which is minimal for a market like coffee.

3. Where is the market likely to go next?

Without using hindsight I can tell you there are two things that would have made me apprehensive about shorting this market: first, the fact that the weekly chart shows the market trading at the bottom of the range which has held the market for almost a year; and second, the high closing price last Friday.

Because of these two pieces of information we might have deduced that the market could rally off the weekly support rather than breach it. If Friday’s closing price/session had been more bearish it could have been more plausible to think the market could make a run at the lower end of the trading range; however the bullish session combined with the weekly support would have made me very apprehensive about shorting this market from here.