Happy Mother's Day!

I have to apologize. In spite of our best efforts to bring you the “new and improved” site this weekend, we ran into some technical difficulties and were unable to get everything ready in time. I’m sorry. Really. I didn’t mean to do it…honest. ;-)

Hopefully everything will be on track this week and we can get the ball rolling. We will send you an announcement via email when everything is up and running. I don’t know why, but these projects always seem to take a lot longer than expected.

Isn’t there a Murphy’s Law like that? That the amount of time required to finish a project grows exponentially as the deadline shortens arithmetically? Whatever the case, there never seems to be enough time to get everything done…that and closet space. There never seems to be enough closet space.

Now that our house is sold we have to get rid of a lot of ‘junk’ that we had been storing in the various nooks and crannies. It’s either that or pay the movers to move it. So this last weekend we decided to have our annual garage sale.

We have a garage sale every year, but it always amazes me how much stuff we collect in the 12 months between sales. This year’s sale was a whopper. I found things to sell that I forgot I had. It took me more than an hour to move everything to the front lawn and set it up for selling.

Everything was priced to go, with most items between 25c and a buck. When the dust settled I managed to flog most of the items and made about $400 for the afternoon (that should give you a rough idea of how much ‘junk’ we had!) And just in time for Mother’s Day.

Funny thing is, in spite of selling as many items as I did, we probably have enough stuff to have another sale next weekend. Oh well, thar’s gold in them thar attics! ;-)

Enjoy this week’s issue.

• Exchange: CBOT
• FND: 6/30/03
• LTD: 7/14/03
• Options Expire: 6/20/03
• Contract Size: 5000 bushels
• Point Value: 1 ct = $50

The bulls got serious in the corn market last week and sent prices rocketing higher. After stalling briefly short of the resistance at 238 ¾ the market shot through the 249 resistance to finish out the week at 253, which is the same as the daily 38% and weekly 50% retracement levels.

The quick advance of last week would suggest that we will see prices consolidate this week before resuming the bull trend.

This Week:

While I would expect a pullback in prices this week, I certainly would not consider shorting the market at this time; rather I would use the opportunity to either re-enter the market or to add to existing positions if you are already in.

There is a lot of support around 244 ½ which will be the first barrier to keep prices from falling. Actually I would not be too surprised to see prices rally from here, so keep a look out for signs that the market is showing support.

While there is more support at 242 ½, I would think that if the market got through the 244 ½ barrier then the next significant support would be found at 241. I would think that entering a long position somewhere in this neighbourhood, with stops below strong support at 238 ¾, would be a good place to get in.

Next upside target would be the daily 50% retracement level at 260.

• Exchange: NYBOT
• FND: 6/24/03
• LTD: 7/09/03
• Options Expire: 6/13/03
• Contract Size: 50,000 lbs
• Point Value: 1 point = $5

Well that was quite a week for cotton, wasn’t it? After stalling out at 5540, the market failed to give us the pullback move we anticipated and rather fell through the support like the proverbial “ton-o-bricks”. The market fell to 4990, near the old support at 5000, before finally bottoming out. Now that the market got the big retracement out of the way we will probably see higher prices again, at least for the shorter term.

This Week:

The market made a strong commitment to the bulls last Friday with a good bounce off support and a strong close near the highs. Look for prices to continue higher this week at least to resistance at 5540 or 5580 before encountering difficulty.

From here we may see prices bounce or thrash about a bit as the market attempts to keep its bullish composure. Long term we will probably see the market try to get to the gap at 5680 where it will also run head long into weekly resistance.

• Exchange: CBOT
• FND: 6/30/03
• LTD: 7/14/03
• Options Expire: 5/23/03
• Contract Size: 5000 bushels
• Point Value: 1 cent = $50

While the long term trend for beans is still very bullish, the diminishing volume and dipping open interest of last week seem to suggest that the current rally is running out of steam and we might see a pullback in prices next week. Exactly where the market is topping out however is the big question of the day.

This Week:

In spite of the strong close on Friday, the market is beginning to find substantial long term resistance. If the market did manage to push higher this week, the next resistance at 647 and 654 could be enough to send prices lower. The close proximity of these resistance levels makes me hesitant to commit to another long position until the market either bounces or breaks through these levels.

Ideally the trend will rebound off either of these levels and send prices lower next week. As prices fall look for the market to find support as it approaches 606. There is fairly strong support at this level, and those among you that can afford the risk might consider establishing long positions at this point.

The more cautious traders can wait and see how the market reacts off the 606 support before committing to the trade. If the market should violate the support at 606 it will probably hold up near the top of the gap around 594 before resuming the uptrend.

Next upside target for the renewed bull trend is resistance at 660.

• Exchange: CME
• FND: 6/9/03
• LTD: 6/30/03
• Options Expire: 6/6/03
• Contract Size: 40,000 lbs
• Point Value: 1 point = $4

After so many weeks of honouring support and resistance lines almost perfectly, cattle have stopped playing nice.

Prices last week continued to break through one resistance level after another, even though the market is mildly overbought, showing divergence and most importantly, looks to have it's head buried in some significant long term resistance. In fact, I’m not sure what is holding the market up!

Everything continues to signal that lower prices are just around the corner; therefore I would keep looking for shorting opportunities in the short term and long term.

This Week:

The next significant weekly resistance level is located just above Friday’s highs at 7430. Those of you looking to enter the market early could use this resistance level as a guide with stops placed above the next resistance level at 7555.

Given cattle’s disrespectful nature of late however, you might want to wait for a sign that prices have stopped advancing before committing to a short position. A stall in prices at either level would be hint enough for me to initiate another short position from there.

First downside target would be support at 7165 where we could anticipate a bounce or pause of sorts. Long term should see lower prices continue with support at 7040 looking like a possible target right now.

• Exchange: NYBOT
• FND: 6/17/03
• LTD: 7/16/03
• Options Expire: 6/6/03
• Contract Size: 10 metric tons
• Point Value: 1 point = $10

Cocoa took a little longer finding support than we expected and slid through the support at 1905 and 1880 before finally settling on the lows from a month ago. The market has been choppy of late, looking bullish one day and bearish the next. The surge in volume last week and declining open interest would seem to suggest that the bulls are jumping ship, making it fair game for the bears in the short term.

This Week:

While the market has adopted a more bearish posture this week, we should see prices rally before they decline further. The support of last week becomes the new resistance this week. Look for the market to hold up near 1880, or 1905 for sure. If the market shows reluctance to get through this level it could be a good chance to short the market from here. Stops should go above the resistance at 1915.

The next downside target would be around the daily and weekly support at 1710.

If the market breaks through 1915, then it would be a sign that the bulls have not given up entirely and all short bets are off. For this week however I think the better potential would be to the short side.

• Exchange: NYBOT
• FND: 7/1/03
• LTD: 6/3/03
• Options Expire: 6/13/03
• Contract Size: 112,000 lbs
• Point Value: 1 point = $11.20

Sugar is one of these markets that I have a love/hate relationship with. Although I expected the market to be choppy until it found support, the market gave a couple of false bullish signals last week before continuing lower still. It seems to have backed itself into a corner now though, so it should be fairly safe to assume that higher prices should follow this week.

This Week:

A break above Friday’s high would confirm that the bulls have returned to the market and higher prices should continue. The first upside resistance to the trend is found at 720. Exiting here would yield approximately $300 per contract.

Since placing stops below the current lows would make this trade impractical you could use the support at 684 to make the risk/reward more palatable. Putting stops here would have less than $100 risk exposure, making it a very reasonable trade.

Things could get a little dicey as the market approaches resistance at 740; otherwise it looks as though the next target would be resistance at 762.

• Exchange: CME
• FND: 6/16/03
• LTD: 6/16/03
• Options Expire: 6/6/03
• Contract Size: 125,000 SF
• Point Value: 1 point = $12.50

The Franc made some huge gains last week as the market broke through the old contract highs with hardly any hesitation at all. By the end of the week however the strong bull rally began to show signs of weakening and formed resistance at the new contract high.

While the weekly charts do not show too much resistance at this price it is nonetheless a significant monthly resistance level. This makes me believe that we will see lower prices for the Franc this week.

This Week:

Given that the Franc can be a large ranging market it is not often that we can trade it with minimal risk exposure. In fact the last good opportunity to trade the Franc with only a few hundred dollars at risk was almost six weeks ago…that is until now.

Shorting the market somewhere below Friday’s low with stops above the high would have approximately $450 at risk. While there is support at 7500 which could trip things up, it seems that the significant support is at 7435. This would have a profit potential of just over $2300 per contract, or about a 5:1 risk/reward ratio.

Longer term is a more difficult call as the market may once again turn bullish after pulling back and finding support. However if the market continues to fall, the next downside target could be support at 7280. The potential is there; however we will have to see how the market reacts if/when it finds support at 7435 to get a better idea of where it wants to go next.

• Exchange: COMEX
• FND: 6/30/03
• LTD: 7/29/03
• Options Expire: 6/25/03
• Contract Size: 5000 Troy oz
• Point Value: 1 cent = $50

Silver continues to test resistance at 483, giving us an opportunity all last week to enter this market short at very good prices. Silver is tipping its hand and suggesting quite strongly that lower prices are coming very soon.

This Week:

After a week of testing the resistance at 483 I would think that the market is getting pretty tired of trying to break through. The ideal circumstance would be to see silver to give up the rally early next week and have prices fall to support at 465 or quite possibly 460. Don’t be too greedy however as this is a counter-trend trade and the longer term outlook for silver still remains bullish.

If the market does give us the pullback we are looking for, it would be possible to re-enter a long position from around 465 and ride the market back up to the next upside target at 493. There might not be too much life left in the bull trend beyond here however, as the market encounters even more daily and weekly resistance.

While a few markets are showing potential this week, my favourite would have to be the June Swiss Franc. After a very strong rally for the last couple of weeks, the market seems to be weakening and might be signalling a reversal next week.

We don’t normally trade currencies like the Franc with such a small account, but the current formation is almost too good to pass up. Ideally I would like to see the market test the resistance at 7654 one more time before giving up and heading lower. We will place our order to short the market just below Friday’s close with stops above the current highs.

This downside move could have some potential behind it, so if engaged we will trail our stops above the previous day’s highs. There could be some difficulty around 7500 as the market encounters support, so we will not move our stops too tight until the market is through this level.

Short term target is support at 7435. Right now I would probably plan on exiting near this support and perhaps take another position short if the market manages to break through here as well.

That’s a rough outline of the plan for now. We may have to adjust it next week after we get some feedback from the market.

• Entry: 7621
• Stop Loss: 7659
• Dollar Risk: $475
• Profit Target: 7438
• Potential Profit: $2287
• Risk/Reward Ratio: 4 ½:1
• Degree of Risk: Moderate to High

This post 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.

Answer:
If a market is very volatile, it is possible that it can move against you, exceeding your stops and stopping you out for more than you intended. In a worst case scenario, the market can make a limit move against you, thereby making it almost impossible to exit your position.

When a market makes a limit move against you, your loss is the amount of the move against you, relative to your entry, just like with a regular stop loss order. The only difference is that in a limit market, the market is moving so quickly that you are unable to exit. This is probably every trader’s nightmare.

Worse yet, some markets can make limit moves two or three days in a row! This is always a very real threat when trading markets that have daily limits, and in such an instance, an option would provide you more protection than a stop loss order.

However, you should usually try to avoid markets that are ranging too much or acting too unpredictably anyway. Prevention is definitely the best medicine where possible limit moves are concerned. For instance, if you are concerned about limit moves you would never want to trade a market like Pork Bellies that seems to make limit moves on a regular basis.

The way you structure your trades can help keep you out of markets that are moving the wrong way as well. By placing your entry orders beyond support or resistance levels, you make the market come to you and “prove you right” before you become involved with a contract. Yes, you might miss some moves by doing this, but chances are good that when you are in the market it will be going in the direction you want it to.

While options would provide better protection than stops in a runaway market they have their downside too.

Options are usually more expensive to use than stops. You might have noticed that I regularly suggest trades that have a couple of hundred dollars at risk; however keeping risk this low is not always possible when using options.

To provide the best protection, the option would need to be purchased as close to the money as possible. Most options near the money are at least several hundred dollars, and in some markets, several thousand dollars. I know you will recover some of that money when you liquidate the option, but for most trades you could actually open yourself to a larger loss than if you had used a stop loss order.

Using options can make it more difficult for a timely exit from the market you are in as well. Options and futures are traded in different pits, so in effect, they are two different markets. I've used options in place of stops occasionally and when I have tried to exit, instead of absorbing the six point loss I was expecting, I would end up with a 10+ point loss. Therefore using options do not necessarily limit your loss to an exact amount either.

Using options in place of stop loss orders does not always keep you from receiving a margin call either. Options are purchased outright, and while they have a definite value, your brokerage will usually not recognize them until you liquidate them. Futures contracts on the other hand, affect the balance of your account at the end of every business day. Therefore if you have a losing futures position you might get a margin call from your broker even though you have an option as protection.

If you are just starting out I would suggest learning to trade using stop loss orders instead of options. If you really wanted to, you could papertrade with and without options to see which scenario works out better for you. However, I think you will find that using a stop loss order is easier and more efficient in the long run.

-Erich