Would you mind giving me a hand with something?

As many of you know I’ve been working on a support and resistance trading manual for the last few months. Well I’m happy to announce that it is almost finished. I figure I’ve got a couple more days of “tweaking” and then it will be ready for public consumption.

The problem is I don’t have a title.

I normally consider myself to be a fairly creative guy, but I’m having a heck-of-a-time coming up with a title I like; therefore I thought maybe you could give me a hand.

The manual has to do with the ins and outs of trading support and resistance: what it is, how to find it and what to do with it once you know about it. It is essentially an account of how I use support and resistance to trade the markets.

Sounds easy enough, right? I thought so too, but all my titles sound like I pulled them out of the Encyclopaedia Britannica. Can you give me a hand with this one?

As a reward for your efforts, the winning title will receive a copy of the manual free of charge. Now where else are you going to find a great deal like that? ;-)

Trust me; this is one trading manual worth having. Even if you think you know how to trade support and resistance I guarantee you I’ll show you something new. And if you don’t know how to trade support and resistance you need to have this manual most of all!

So put on your thinking caps and give me your best title(s). Send the responses to ErichTHT@hotmail.com and thanks for helping me out.

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

Corn continued to rally hard last week reaching our target at 260 before giving us the pullback we anticipated. This week looks a little more certain for our pullback; however I would not try to push the market too low.

Corn is entering a weather sensitive time of year for this crop. The corn plants will be silking soon and dry hot weather can reduce potential yields and be very bullish for the market.

This Week:

A break below Friday’s low should see the market fall to nearby support at 244 ½ or maybe even 241 ¼ before finding some footing and resuming the uptrend. With stops above Friday’s high, this short term trade would have approximately $175 at risk for a $475 reward, or about 2 ¾:1. By using the matching highs at 256 it is possible to reduce the potential risk even more to $150.

The long term outlook for the market is definitely bullish. Look for opportunities to enter the market long from around 244 ½. With stops below support at 241 or 238 ¾ it is possible to structure a low risk trade for about $175 to $250. Next upside target would be the 50% retracement of last year’s trend at 262 for a potential profit of $875.

• 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

While cotton still has a bullish outlook, the market paused most of last week near the resistance at 5540. This gives us an excellent opportunity for a low risk trade for this week.

This Week:

The market actually stalled short of the 5540 resistance at 5520. Even though Friday’s range would suggest lower prices next week, I think you could expect to see the market break the 5540 resistance.

A conservative trade would be to enter the market long on a breach of 5540 with stops below the resistance of last week at 5520. This would have a very low risk trade for cotton with only about $175 per contract at risk. A short term target at the bottom of the gap of 5680 would yield potential profit of $670, or a healthy 3 ¾:1 risk/reward.

The more ambitious among you might consider entering the market before it breaches 5540. Entering above Friday’s high with stops below support at the gap of 5360 would have about $350 at risk. Using 5680 as a target would yield a potential profit of just over $1250, or a 3 ½:1 risk/reward ratio.

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

Beans continued to rally last week in spite of bearish pressure. It looks as though the market has found its top however, just short of weekly resistance at 654.

This Week:

A break below Friday’s high would definitely be a strong selling signal. With stops above Friday’s high you would have about $500 at risk, a little more than I would like, but it is the best place for the stops. Once the order was engaged you could move the stops above the next session’s high which should make the risk a little easier to stomach.

Downside target would be support at 606; however support at 625 might cause the market to stall so keep an eye on it as it approaches this level.

Long term outlook for beans is still very bullish so look for buying opportunities as the market finds support. Entering near 606 with stops above the gap at 594 would again have $500 at risk.

The upside target would be resistance at 673, but even if the market re-tests the weekly resistance and contract high near 654 you would have a potential profit of $2400, or a very attractive 4 ¾:1. Don’t expect the market to make a straight line there however, but this does seem to be a reasonable target nonetheless.

• 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 a couple of weeks of uncharacteristically high cattle prices it seems that the market may have finally found a top. Technical indicators are suggesting that we should see lower prices very soon, hopefully beginning next week.

This Week:

I would look for cattle to test the upper limit one more time early next week, possibly getting as high as 7500. This is a fairly substantial weekly resistance level and I would not expect the market to break through in its current condition.

Shorting the market as it gets near the highs with stops above the 7500 resistance should allow a very low risk trade.

A more conservative approach would be to enter below Friday’s low should see the market fall to support at 7220, where it might stop to gather itself. Once it is clear that the bears have the upper hand look for prices to continue lower to the next support level at 7175-7165. Long term target is support at 7040.

Downside targets remain the same in either scenario.

• 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

Well the good news is we called this market almost to a tee last week. Almost. Unfortunately we didn’t see the bounce off of last week’s support, instead the market was content to break support and continue lower to our target.

This Week:

The market has a much more bearish posture than it did last week and I think we will probably see higher prices follow, at least for the short term. The bulls stepped up to the plate on Friday and signalled that the current support should hold for the time being.

A break above Friday’s high should see prices continue higher, probably to resistance around 1875. With stops below the current lows you would have approximately $500 at risk to potentially earn $1200. Just shy of 2 ½:1 risk/reward. Not too bad.

Watch the market as it gets to 1856 as there is some resistance there that could cause some problems, but right now it looks as though we will see 1875 or 1905 before the market reverses again.

Long term still looks like short is the way to go. I would consider a short position as the market approaches 1875 or 1905. Stops above the 1905 resistance would have approximately $300 at risk. The next target for cocoa seems to be the support at 1645 for a potential profit of $2300.

While I do not expect the market to make a bee-line there, it looks like this is where it will eventually go.

• Exchange: NYBOT
• FND: 7/1/03
• LTD: 6/30/03
• Options Expire: 6/13/03
• Contract Size: 112,000 lbs
• Point Value: 1 point = $11.20

As expected, sugar continued to thrash about last week as the bulls and bears sort things out. It is looking as though the bulls have the upper hand so we can expect higher prices for the short and long term.

This Week:

I would love to take a position just above Friday’s high with the stops below the support at 684. This would get you into a trade for less than $100 with very good upside potential.

Even a conservative trade would see a 3:1 return. Exiting near 725 would give you just over $350 profit per contract. This would be an excellent opportunity to trade multiple contracts with a minimal amount of risk.

For the longer term look for the market to exceed the 725 resistance and test the resistance at 750. We could expect a bit of a bounce or pause here, so it might be a good place to exit and re-enter once the market pulls back.

Long term outlook is very good for the bulls with a target of 905 looking like a possibility.

• 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

Although the long term outlook for the Franc is bearish, I think we might see higher prices continue for the short term. Last week’s pullback was not as substantial as anticipated and the market seems to have found support now, suggesting higher prices next week.

This Week:

If the market can exceed the contract highs then we should see prices continue to rally. There is mild long term resistance at 7760 but other than that there is not too much to keep the market from realizing resistance at 7833. This will be a tough level to get over however, so it might be prudent to exit or tighten stops in anticipation of a bounce or reversal.

To minimize the risk exposure, stops could go below the mild support at 7650. This would have just under $600 at risk with a possible reward of near $1700, or just shy of a 3:1 risk/reward ratio.

• 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

Like corn and cocoa, silver failed to give us the pullback we hoped for and rather continued along to 491, just a couple of points shy of our target at 493 before stalling. The market is getting a little more difficult to call as it is encountering substantial resistance both in the short term and the long.

This Week:

For the short term I think we can expect to see prices decline at least to support at 471. Look for the market to form support here as it finds a lot of resistance in the 468-471 range. While there is the potential for a very short term downside trade, I would rather wait for the market to find support and use this as another opportunity to go long.

Entering somewhere around the 468-471 support with stops below 468 or 465 should offer the potential for a low risk long position.

If/when the market bounces you could expect prices to continue higher to the resistance at 493. This could be the nearing last rally for the bulls however as the market is beginning to show more bearishness. I would not be too surprised to see the market trading around 450 in about four to six weeks time.

Well it was bound to happen. After 16 weeks of trading we finally took a loss. Thank goodness it was only $300!

As you might remember I was a little hesitant trading the Franc last week because of the large ranges this market is capable of making; therefore we kept a tight trailing stop on the market, just above the previous day’s high, just in case the market had not topped out yet.

Oh well, it was worth the risk if it had worked out. This is why it is so important to calculate your risk/reward ratios for every trade: so that you can find the trades that are most worth taking.

This week is looking interesting as there are so many markets setting up nicely: beans, cocoa, cotton and even the Franc again; but I think we will give sugar a try this week.

Sugar can be one of those crazy markets. Sometimes, just when you think you’ve got it cornered, it will do the exact opposite of what you expect. This week however we’ve got a very good opportunity to enter with very little risk exposure. In fact the risk level is so small that we will look at trading two contracts. The important part of this trade will be getting a good entry, hopefully just above Friday’s high.

• Entry: Long 2 contracts from 693
• Stop Loss: 681
• Total Risk: $135 per contract ($270)
• Profit Target Contract 1: 723
• Potential Profit: $330
• Risk/Reward Ratio: 2 ½:1
• Profit Target Contract 2: 744
• Potential Profit: $570
• Risk/Reward: 4:1
• Degree of Risk: Low to Moderate

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.

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.

Question:
If the market opens above your short position or below your long position what do you recommend? When a market gaps open it is very confusing to me.

Answer:
This is an excellent question as gapping markets are a source of concern for many traders.

Some traders refuse to trade if a market gaps and opens abnormally high or low, thinking that this is a sign that the market is acting unpredictably. Other traders will take positions opposite an unusually high or low opening, knowing that the market might move away from the opening price. This is known as “fading” the market and is a strategy used by day traders.

How important the opening price is depends a little on your objective as a trader. For instance, if you are a day trader the opening price will hold a lot more importance for you than if you are a position trader who is looking to capitalize on a move that may take several days to realize.

Generally speaking, opening prices are not as important as closing prices. Closing prices usually set the tone for the next session. If a market posted a high closing price (relative to the opening price) and you decided to go long the next day above the high, I would not be overly concerned if the market opened below the entry price. In fact I would prefer it.

If you are planning a long position and the market opens below your entry, then the market has to come to you before your order is filled. By doing this you are essentially making the market prove that you are right before you become involved in the trade. This is a very powerful strategy and one that I try to employ as often as possible.

This assumes of course that you are entering the market on a stop order and not a limit order. If you are using a limit order to go long, and the market opens below you, then you will be filled at the opening price. This scenario is not as desirable as the former as there is the possibility that the market may continue moving lower after the open.

However, by using a stop order and making the market come to you, you can avoid being on the wrong side of the trade if the market does not do as you had hoped. For this reason I always recommend using stop orders to enter the market.

Another scenario is if you are considering a long position and the market gaps above your opening price. When this happens you are faced with a much more difficult decision. Now you need to re-evaluate your trading plan to determine if there is still enough profit potential to offer a good risk/reward ratio before you enter the trade.

As I mentioned at the beginning, some traders will not trade a market that gaps too far above their entry for fear that the market will “fade” and move against their positions. This is not always the case with gaps however. Other times when the market gaps it is a sign that the market is accelerating quickly.

While the day trader may be able to discern between the two, the position trader unfortunately will not know the market’s true intention until the end of the session.

Trust your gut. If you feel unsure about how the market opened then it is probably best to set it aside for the day. But as a rule I would not be overly concerned if the market opened below my long order, or above my short order.

Erich