Monday, February 07, 2005

Traders Helping Traders Big Weekend Edition - Part One

Need help with Entries, Exits and Trade Management? Read on!

About this eZine:
This is only Part One of a two part publication that is broadcast each Sunday. There are also two daily market updates each day of the week, one each from Erich and Tom, to keep you abreast of what they see happening and what they're doing in the markets.
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In This Issue- Part One
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1. Shootin' the Breeze
2. Live Class
3. The Markets
4. Pick of the Letter
5. Lesson du Jour
6. December Score Card
7. Homework
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In This Issue- Part Two
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7. Tom's Trades
8. Tom's Education Page
9. Asher's Daily Trading ranges
10. The Commercial Stuff
11. The Legal Stuff
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There is considerable monetary risk associated with trading commodity futures. Never place at risk more than you can comfortably afford to lose! Charts are all courtesy of Gecko's Track 'n Trade.
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March Corn CH5
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Exchange: CBOT
FND 2/28/05
LTD 3/14/05
Option Expire 2/18/05
Contract Size: 5000 bushels
Point Value: 1 ct = $50
Trading Hours 10:30 am – 2:15 pm EST

I wish I had something new to say about corn this week, but I don’t. As one trader put it “trading corn right now is like watching paint dry.” That pretty much sums it up. While the market is fundamentally bearish, traders are reluctant to sell it below the significant long term support on the lows.
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This Week:
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We did end up selling corn on last week’s low however, as prices pushed through the previous support level enough to find our entry order. While I prefer to enter a market on a decisive breakout, I’m not too disappointed with our position since I think we’re on the right side of the trade and we’ve only got $100 at risk if things go wrong.

If you did not sell corn last week there’s no rush to get in. Prices are likely to creep lower, but we probably won’t see anything substantial happen until this week’s Supply and Demand report due out Wednesday. I’m not expecting anything profound to come out of the report, it seems everyone knows there’s a lot of corn out there and not a lot of buyers right now; however once it becomes “official” we might see traders a little more open to selling at these levels.

You could trade nearly the same numbers as last week, with the exception of allowing a bit more room on the entry side – just so we don’t get caught in corn’s aimless wanderings. I’d probably look at selling on the other side of the 194 line and either cover the trade above the 196 resistance, or if you wanted to keep things really tight, use the strong resistance at 195 to signal your exit.

Profit target remains the same, the support at 184, but if see a break through here then corn’s got a little room to move before the next support at 174 – 175.
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Trade Summary
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SELL March Corn at 193 3/4
Exit Order: 196 1/4
Approximate Risk Exposure: $125 per contract
Profit Target: 184 3/4
Approximate Potential Profit: $450 per contract
RRR: 3 1/2:1
Degree of Risk: Low to Moderate
Click here for the Market Minutes Audio Commentary on Corn.

Corn Chart here in the Subscriber Edition.

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March Cotton CTH5
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Exchange: NYBOT
FND 2/21/05
LTD 3/8/05
Option Expire 2/11/05
Contract Size: 50,000 lbs
Point Value: 1 point = $5
Trading Hours 10:30 am – 2:15 pm EST

We caught a nice little move to the downside last week in cotton, before prices gave us a little hiccup by the weekend. We’ve currently got exit stops at breakeven, which is a good place to be in cotton going into the weekend. Hopefully Monday’s session will see prices continue lower to our first profit target at 4250.
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This Week:
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As is true in many of the markets right now, cotton is at significant long term support. Looking at your weekly and monthly charts it should be obvious the support at the current lows. These price levels are lending some support to prices and as such we could see cotton bounce a little higher this week – but hopefully not.
There is a significant support level in cotton which is really a “line in the sand” for this market. We shorted cotton early last week in anticipation of picking up a few dollars before the market encountered the support level. If you’re not currently short this market then it would be prudent to wait for prices to test this support line before getting involved here.

We’ve still got some time however, and this is such an important issue that I want to use this market to illustrate the concept in the homework section, so I can’t tell you what the level is – just yet. But if anything interesting develops early in the week I’ll be sure to let you know. In the meantime head to the homework section and share your answers at the Support and Resistance Forum

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Trade Summary
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Continuation of SHORT March Cotton from 4367
Exit Order: 4307
Approximate Risk Exposure: $0
Profit Target: 4251
Approximate Potential Profit: $580 per contract
RRR: n/a
Degree of Risk: n/a
Click here for the Market Minutes Audio Commentary on Cotton

In the Subscriber version the Chart is here.
click here to sign up.

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March Bean Oil BOH5
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Exchange: CBOT
FND 2/28/05
LTD 3/14/05
Option Expire 2/18/05
Contract Size: 5000 bushels
Point Value: 1 cent = $50
Trading Hours 10:30 am – 2:15 pm EST

Bean Oil gets the “most annoying market” award for last week’s performance. We nailed the market’s intentions beautifully; however as is typical of bean oil, we got whipsawed out of the trade before prices eventually made their break to the downside, but it looks as thought this week we may have another chance at this market.
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This Week:
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Excellent growing conditions in South America are adding increasing pressure to the Bean market and its related commodities like Bean Oil. While we don’t normally follow fundamentals, it’s sometimes good just to keep general information like this in mind so you have an overall “feel” for the marketplace.

While last week’s prices finally broke the significant long term support at 1930, we did see Bean Oil give us some support on Friday’s session. I’m not too interested in buying this market mind you; however a bit of a rally could give us another chance to sell from a better price level. Keeping your eye on the RSI indicator could be the key to timing your entry. If prices continue higher, look for possible resistance as RSI approaches the 50% level and resistance at 1930 and 1950.

If bean oil manages to rally this high it will almost be a sure sell signal. Having said that however, we could see bean oil continue lower as early as Monday, but as with the other grain markets, I think we will see the market significant moves occur on Wednesday with the release of the Supply and Demand report. Again, it is likely that prices will continue lower with the trend.

Given the support which formed last week however, I might consider selling a break of the 1882 level and try to trade bean oil down to the next support at 1750. This means we will have to “ignore” the 1850 support; however worst case scenario, we should be able to get stops to breakeven before we see a possible reaction to 1850.
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Trade Summary
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SELL March Bean Oil at 1879
Exit Order: 1906
Approximate Risk Exposure: $162 per contract
Profit Target: 1761
Approximate Potential Profit: $708 per contract
RRR: 4:1
Degree of Risk: Moderate
Click here for the Market Minutes Audio Commentary on Soybean Oil

In the Subscriber version the Chart is here.
click here to sign up.

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April Live Cattle LCJ5
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Exchange: CME
FND 4/04/05
LTD 4/29/05
Option Expire 4/03/05
Contract Size: 40,000 lbs
Point Value: 1 point = $4
Trading Hours 10:05 am – 2:00 pm EST

What a mess the cattle market is. This market is literally torn apart by all the fundamental news floating around – some of it bullish, the rest bearish. I’m sure glad I don’t trade fundamentals!
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This Week:
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While cattle are obviously in a strong uptrend, I have to admit that I’m just a little uneasy about buying at these prices. The monthly chart shows us trading as a rather significant resistance level at 8875 (adjusted) and while we could plan a buy above here, we run into more resistance at 9000 making it difficult to get any kind of decent risk/reward ratio without making stops exceptionally tight.

I believe that we will see a reversal on Monday and cattle prices head lower – but I’m not sure how much lower. I would need to see cattle trade/close below 8760 before I could even get halfway serious about selling. The problem with selling is the same as with buying, namely that there is too much resistance nearby; however once we’re below 8760, then the market could be considered to be technically bearish and we will have broken the up-trendline as well.

RSI bouncing off the trendline, which would suggest that prices should head lower as well; however this market is so jumbled up that I feel better about waiting another day (or two) before committing to the trade.
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Trade Summary
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FLAT April Live Cattle
Click here for the Market Minutes Audio Commentary on Cattle

In the Subscriber version the Chart is here.
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March Cocoa CCH5
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Exchange: NYBOT
FND 3/1/05
LTD 3/16/05
Option Expire 2/4/05
Contract Size: 10 metric tons
Point Value: 1 point = $10
Trading Hours 8:00 am – 11:50 am EST

Cocoa began the week looking reasonably bullish, and we even tried to buy the market on Wednesday, but the opening gap kept us out of the trade. By the weekend however prices quickly halted and even reversed on Friday as prices seemed to have found resistance.
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This Week:
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Looking at your RSI indicator you should be able to see some divergence, as prices have been heading higher, but RSI was heading lower (see chart below). This is a classic signal that the trend is not as strong as it was and that a reversal, or resistance, might be nearby. This looks like what we are seeing in cocoa.

While cocoa is still technically bullish, you might consider selling the market below Friday’s low. This is a slightly riskier trade than waiting for prices to trade below the 1550 support however. RSI is not quite to a “test point” yet, and as such we could see cocoa recover off the 1550 level. Personally I’ll be holding off until we see a test of the 1550 support line, but if you wanted to be more aggressive selling the market you could sell below 1560 and cover the trade above 1575 – just too keep risk reasonably small.

Otherwise, if you’re looking to be a little more cautious with cocoa, wait until we see a test of 1550, which should occur early this week. Once we get closer to 1550 and/or the RSI trendline, it should be easier to enter the market with greater confidence. Remember, there is no hurry to trade, so if you can not afford the loss, you will be better off waiting.
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Trade Summary
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FLAT March Cocoa
Click here for the Market Minutes Audio Commentary on Cocoa

In the Subscriber version the Chart is here.
click here to sign up.

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March Wheat WH5
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Exchange: CBOT
FND 2/28/05
LTD 3/14/05
Option Expire 2/18/05
Contract Size: 5000 bushels
Point Value: 1 ct = $50
Trading Hours 10:30 am – 2:15 pm EST

As usual wheat mimicked what was happening in the other grain markets this week. Prices spent most of the week bouncing around as a lack of demand and abundant supplies from around the world kept a lid on prices heading higher.
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This Week:
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As I’ve mentioned before, the grain markets are looking for any excuse to rally; however until planting season arrives, or something serious happens to the demand side of the equation, wheat, along with the other grains, are almost certain to head lower. Just as an aside I think we will see a doozey of a grain rally this spring/summer as the slightest spark of bullish news (especially hot/dry weather news) will be just what these markets need to light a fire under the bulls and send them into a buying spree.

Until then however we will continue to sell, but it will be tough. Like the other grain markets, the monthly (and weekly) chart shows clearly why prices are hesitant to head lower. There is simply a lot of support at these prices and traders are reluctant to send them lower; however the midweek Supply and Demand report is likely to weigh on prices and give sellers the impetus they need to become more aggressive.
If wheat prices should continue lower below last week’s support at 287, I would look to sell, but not until 285 ¾ - just to be on the safe side. As much as wheat has been wandering lately, I would rather give up a tick or two to stay on the right side of the market, than get whipsawed.

Initial exit stops could go above the intermediate resistance at 288 – 289, although placing them above the 291 resistance would be ideal, but expensive. First profit target is support at 265, but it is likely we will see prices continue lower still for the long term.
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Trade Summary
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SELL March Wheat at 285 3/4
Exit Order: 289 3/4
Approximate Risk Exposure: $200 per contract
Profit Target: 266 3/4
Approximate Potential Profit: $950 per contract
RRR: 4 1/2:1
Degree of Risk: Moderate
Click here for the Market Minutes Audio Commentary on Wheat

In the Subscriber version the Chart is here.
click here to sign up.

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March Canadian Dollar CDH5
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Exchange: CME
FND 2/28/05
LTD 3/15/05
Option Expire 3/04/05
Contract Size 100,000 CD
1 point = $10
Trading Hours 8:20 am – 3:00 pm EST

The Canadian Dollar spent most of last week bouncing between support at 8018 and resistance at 8100. By the end of the week however, we saw the market break significant support as the US Dollar rallied sharply. If you took last week’s trade then you’re currently short this market, but if you didn’t you have another chance to sell this week.
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This Week:
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There is always a bit of added risk when you decide to sell a market early, like we did with the CD. There is always the possibility of a reversal after a significant resistance/support area is breached. This is why in the manual; I remind you that the “safest” way to enter is after a breakout has occurred. Of course it is a double edged sword where sometimes waiting for the breakout can leave you out of the trade if the market moves too far.

If you sold the CD last week there will be a bit of nail biting going on Monday as we’re not able to move our stops just yet. Unfortunately the market didn’t close low enough after breaking support to allow us to bring our stops in a little tighter. The breakout was decisive though, and I do expect rates to head lower, the trick will be holding on in the meantime. Hopefully the market will continue lower on Monday and allow us to at least bring stops to breakeven.

If you did not sell the CD last week, you’re in a slightly better position since you can sell below last week’s low without worrying about the daily range stopping you out. Selling on a break of 7996 I would look to cover the trade above the significant resistance at 8017 that we were watching for the last few weeks. You will need to be a little more aggressive on your profit target however and look at the 7870 support as a possible profit taking target to maintain a good risk/reward.
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Trade Summary
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SELL March Canadian Dollar at 7993
Exit Order: 8021
Approximate Risk Exposure: $270 per contract
Profit Target: 7881
Approximate Potential Profit: $1130
RRR: 4:1
Degree of Risk: Moderate to HIGH
Click here for the Market Minutes Audio Commentary on the Canadian $

In the Subscriber version the Chart is here.
click here to sign up.

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March Silver SIH5
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Exchange: COMEX
FND 3/14/05
LTD 3/29/05
Option Expire 2/23/05
Contract Size: 5000 Troy oz
Point Value: 1 cent = $50
Trading Hours 8:25 am – 1:25 pm EST

Like the Canadian Dollar, silver spent most of last week bouncing around without any discernable direction. Many of the precious metals, as well as other market sensitive to the US Dollar, fell off last week as the US buck rallied. If the US Dollar continues higher this week, then we should expect to see silver continue lower again.
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This Week:
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Technically silver is in a downtrend and the bounce in RSI makes me believe that silver will continue lower this week as well. Fortunately we have a pretty solid support line at 659 which we can use to build a trade off of this week.
Selling silver below 659 I would look to cover the trade above the familiar resistance at 662. While this would place about $225 per contract at risk, it is a relatively tight trade for a market like silver. Silver does have the tendency to make strong breakouts however, so a break below 659 will hopefully see prices continue lower still. First profit target is the support at 642, but I wouldn’t be surprised to see silver fall to 630 before recovering slightly.
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Trade Summary
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SELL March Silver at 658
Exit Order: 662.5
Approximate Risk Exposure: $225 per contract
Profit Target: 642.5
Approximate Potential Profit: $775
RRR: 3:1
Degree of Risk: Moderate
Click here for the Market Minutes Audio Commentary on Silver

In the Subscriber version the Chart is here.
click here to sign up.

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December Eurodollar EDZ5
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Exchange: CME
Contract Size: $1,000,000
Point Value: $25
FND 12/19/05
LTD 12/19/05
Options Expire 12/19/05
Trading Hours 8:20 am – 3:00 pm EST

Wow, what a crazy week in the Eurodollar. I was hoping to sell the Eurodollar further; however Friday’s big bounce off support makes it look like the ED is going to rally higher to resistance before we get another chance to sell. It’s not that I’m totally opposed to buying the ED, it’s just that the market is still in a downtrend and as such I’m more comfortable selling than buying.
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This Week:
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But the ED is just barely in a downtrend. If rates continue higher this week, as it looks like they will, we could get more aggressive buying the market as well. RSI is at a test point right now, so we should see a bounce or a break on Monday. The good news is that we have a solid support level at 9622 from which to sell below, the bad news is that the market might run away higher and not give us a chance to sell for a while yet.

The other problem with buying the ED is that all previous rallies have been very short lived – a session or two at the most. Ideally I would like to see a slight hesitation on Monday without rates running away on the downside, and a corresponding bounce in RSI, which would clear the way for me to sell the market on Tuesday. Given that the market is currently at an RSI test point I would like to get more aggressive and sell now; however Friday’s range is too big to allow us to put together a decent trade, so we’ll just have to wait and see what the ED gives us this week.
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Trade Summary
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FLAT December Eurodollar
Click here for the Market Minutes Audio Commentary on the Eurodollar

In the Subscriber version the Chart is here.
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PICK OF THE LETTER
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Instead of just picking one market to follow in the Pick of the Letter, I’ll be listing what I consider to be the three best opportunities for the week coming.
The reason is that many of you are looking for more than one market to follow and are confused as to which your best options are, so I’ll give you my two cents worth. Bear in mind that this is strictly my opinion, and you should still paper trade whichever markets look best to you.
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Pick #3 – SELL March Silver
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This is about as good a setup as we could hope to get in a market like silver – strong support to sell below, favourable RSI bounce and a market disposition for lower prices.
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Pick #2 – SELL March Bean Oil
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While I’m pretty confident about the direction, the trick with bean oil will be getting in and staying in. Hopefully this week we will fair a little better than last week when we got whipsawed.
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Pick #1 – SELL March Wheat
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If we get a bearish report on Wednesday, which we should, it is likely to be just what this market needs to send prices lower still. There’s plenty of support down here, but it doesn’t seem quite as congested as some of the other grain markets.

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LESSON DU JOUR
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Question:
Can you suggest how I should set profit targets and stop loss orders on a trade?

Answer:
Wow, this is a big question! In fact, you could write an entire book dealing with setting profit objectives and stop losses. Let me give you a few guidelines to follow that might help you out.

First, setting profit objectives. Being a support and resistance technician I am always looking for support or resistance areas that are likely to reverse the market. If you are trading a reversing market, one that seems to be retracing part of a previous move, the easiest way to set a target is to use Fibonacci ratios (38, 50 and 62%).

The market will have a tendency to move towards these areas before reacting. By concentrating on significant support or resistance near these retracement areas, I can narrow down my search for prices that are likely to affect the market.

If you are trading a trending market, then you will have to look back in the history of the chart, sometimes consulting a longer term weekly or monthly chart, to find areas of support or resistance that look like they might affect the market.

If the long term chart is also retracing a previous move, you can once again use Fibonacci ratios to give you an idea as to where prices are heading. Keep in mind however, that the longer term charts will take longer to reach their objectives than the daily chart.

When choosing a stop loss, I will again focus on using support and resistance to help me find suitable areas to limit my risk. In a trending market, the best place to trail a stop loss is beyond the pullback areas that develop as the market trends. These are significant as they are proven areas of support or resistance.

Unfortunately, the pullback moves can sometimes be quite large, and leave too much money at risk.

Therefore we sometimes need to find closer support or resistance lines to use as stop losses. Occasionally, the high (or low) of the day will form a good stop loss area, especially if it coincides with other support or resistance. This is usually the least amount of money you will be able to risk on a trade, without having to increase the riskiness of the trade by placing exit stops within the daily range.

If you do need to enter the daily range, in order to minimize the risk enough to make the trade worthwhile, consider placing your exit order beyond the closing price. The closing price will often form a support/resistance area as the market winds down, so this can be an alternative; however be aware that placing your exit order within the market’s daily range does make you more susceptible to whipsaws.

Erich
Got a question that needs answering like an itch you can’t scratch? Send it along to [email protected] and I’ll be happy to try and clear things up for you.
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SCORE CARD
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Available in the Subscriber version.
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HOMEWORK
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Available in the Subscriber version.
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