The markets have been as wild as the weather lately. Rarely do we encounter as many whipsaw trades as we did last week. I haven’t added them all up yet, but I think it might be some kind of record. Fortunately most of the markets calmed down a bit and we were able to pick up some nice profits before the weekend.

The only good news about the whipsaws is the support and resistance allowed us to keep our losses very small. I think there was only one trade we got whipped out of prematurely before the market went in our intended direction. The rest of the trades would have just resulted in bigger losses if we didn’t use support and resistance to limit our risk.

There really haven’t been a lot of trades to choose from however, which is one reason we probably encountered a few more whipsaws. This was the point of last week’s homework assignment, trying to get you to look for the best trading opportunities out of the many options available to us. I’ll have more to say about this in this week’s homework section.

Writing the ezine I’m always torn between recommending just the best trades or recommending various trades and letting you choose for yourselves which suit you best. There is also the paper trading aspect, where I know you want to see as many trades as possible so that you can learn from them as well.

It’s a bit of an ongoing dilemma for me, so if you have any thoughts on the matter I’d love to hear from you. Drop me a note at erich@tradershelpingtraders.net. In the meantime I’m soaking up the hot weather and the cold drinks...after all; this is the weather we’ve been waiting for all year. Bring it on!

Corn has been a disappointing market for the last few weeks. While we’ve known with a reasonable amount of certainty that prices would continue lower, the market continued to gap our entries making it nearly impossible for us to get into this market.

Friday’s session was a bit of a pause in a strong week of declines. This might be the opportunity we have been waiting for to get in.

This Week:

Ideally I would like to see corn prices rally – just a little bit. The market is quite oversold and as such a small rally would give corn prices a “breather” and a chance to gather themselves. Friday’s session, while small, was the first hesitation in the decline all week and might lead to higher prices this week.

While prices might rally I’m not looking to buy. Buying into this market right now would be the financial equivalent of stepping in front of a bus. What I’m looking for is a better price from which to sell.

The 50% level of the decline from the last week and a half is right near the small gap from Tuesday – Wednesday around 240. I don’t think this will be enough resistance to turn prices lower however, and would look for a reaction to the 246 resistance line as an opportunity to sell. If prices continued higher still, then I would think the resistance at 252 would turn the market lower; but it would be better for the bears if the reaction came at an earlier resistance level.

In the meantime I’ll set up a trend trade in case the market continues to fall off this week as well. While the entry line is not so clear the resistance at 233 ½ is an excellent area at which to cover the trade. This is the former contract low and as such should pack considerable punch.

I’ll consider entering the market short if Friday’s low is breached; however don’t be shy about giving the trade a little more room on the entry side to prove itself to you. Profit target is the weekly support at 214 – 215 from where we will likely see a reaction.

Trade Summary

• SELL December Corn below 230 1/2
• Exit Order: above 233 1/2
• Approximate Risk Exposure: $150 per contract
• Profit Target: 214
• Approximate Potential Profit: $825 per contract
• RRR: 5 1/2:1
• Degree of Risk: Moderate to HIGH

Cotton was very cooperative with us last week. The market gave us a very good sell signal about the middle of the week and found our profit target before the weekend thereby giving us a profit of just over $900 per contract.

Notice the bounce prices took off the 4605 support line? This reaction tells me that it might be a good place to initiate another short position from.

This Week:

Entering the market from current levels is a little more risky than the trade we had earlier last week. Last week’s trade had a lot of “ducks in a row” which made entering the market much more predictable. Now the market is already underway, and while we got a good reaction to the 4605 support line, the high closing price could make getting in a little more difficult.

There are two resistance lines above the market which I think will help hold prices down. They are at 4560 and at 4730. While they are not super strong lines on the daily they are backed up by some resistance on the weekly charts as well.

In my mind the only “safe” place to enter the market short is from below the 4605 support line. If the market breaks through here then I think it will be making a run to the next weekly support at 4440, which is the re-adjusted line of 4500 from last week.

When you are transposing long term figures to the daily charts remember that you will need to monitor the price spread between time frames as it will have a tendency to change a little over time. Therefore to have the most accurate figures you should double check your spread every few days – especially in a quickly moving market like cotton.

If prices fall below the 4605 support line, then I would look to the first resistance at 4655 to cover the trade. This places about $250 at risk, which is fairly reasonable for a market like cotton.

Trade Summary

• SELL December Cotton below 4605
• Exit Order: above 4655
• Approximate Risk Exposure: $250 per contract
• Profit Target: 4440
• Approximate Potential Profit: $825 per contract
• RRR: 3:1
• Degree of Risk: Moderate to HIGH

Nice little move in the bean oil market last week. Prices gave us a fairly predictable decline around the middle of the week enabling us to pick up $750 in profit per contract. The only thing that disappoints me about this trade is that I saw the same move coming in the parent soybean market; however I was concerned that the potentially large daily ranges would be too volatile to trade, which is why I stuck to bean oil.

Too bad, it could have been a slam dunk in the bean market last week!

This Week:

I still favour bean oil short this week. We got a bit of a reaction to the 2220 support line last Friday and from the slight upslope in RSI I’m thinking that prices might head a little higher on Monday.

We’re sitting below the 2270 resistance, but if prices poke through there I think we’ll see the resistance at 2315 give the bulls a little trouble. This is also the 50% level of the recent decline and might be a good place to look for a reversal. I’m keeping an eye on RSI too. If Monday’s session rallies it should bring the indicator closer to a “test point”, from where we could enter a short trade with greater certainty.

To the downside we’ve still got that substantial belt of support at 2195, but I think we’ll see prices fall off through here on their way to the weekly support at 2150. This is probably not the end of the ride however, but will certainly be a good place to exit and/or tighten stops.

Look for an opportunity to get into this market early in the week.

Trade Summary

• FLAT December Bean Oil

Live Cattle was the big winner last week as the market took off like a rocket from support. For the last little while prices were looking more bearish on the surface; however this recent rally pretty much confirms that the bulls have not left the market. On the contrary, they seem to be quite alive and well, but having said that, it looks as though we might be in for slightly lower prices this week.

This Week:

There are a couple of things happening which I think will cause cattle prices to regroup this week. First off is the obvious triple hit on the 9000 resistance level. This is going to be a substantial barrier for the bulls to overcome if they intend to drive prices higher still.

Next we have a small gap leftover from last Wednesday’s open, which might call the market lower to fill it. Lastly we’ve got a rather pronounced hook in RSI which also hints of a pending pullback move.

While I have absolutely no interest in selling this market right now (but you should know that by now) I would welcome a pullback as an opportunity to buy the market at a better price. Ideally I would like to see prices fall off to the support at 8700 before recovering, but that remains to be seen.

Cattle has the ability to drive prices higher while RSI falls off - showing a type of “false” divergence. For this reason I’ll try to have a trend trade in place in case the market is able to run prices to the next resistance level.

The obvious entry point is the 9000 resistance line with exit stops either below Friday’s close or the intermediate support at 8970. While it could prove to be a little tight, I’m going to go with the 8970 support area which will help keep risk to about $120 per contract – very reasonable for a market like cattle.

Profit target is the weekly resistance at 9200 which gives us a $800 potential profit. Remember that this is just a back up plan. Ideally we will see prices fall off to support early in the week. Watch your opening prices on Monday as well. If prices opened around the 9050 (or higher) it could be a sign that the market is trying to fade us, so watch your opening range.

Trade Summary

• BUY October Live Cattle above 9000
• Exit Order: below 8970
• Approximate Risk Exposure: $120 per contract
• Profit Target: 9200
• Approximate Potential Profit: $800
• RRR: 6 1/2:1
• Degree of Risk: Moderate to HIGH

Cocoa was the “fly” in last week’s trading ointment. The market gave us a $150 spanking early in the week, but I deserved it for trying to scalp a couple of dollars on a countertrend trade. Every once in a while I seem to succumb to the temptation of a countertrend trade; but the risk is rarely worth it. For every countertrend trade that works out, you will probably have 5 or more than don’t.

I just have to learn to say “no”.

This Week:

I’m not really enamoured with how cocoa is behaving itself lately. Getting whipsawed was bad enough, but did you check out last Thursday’s range? That was one deadly move which would have found a whole lot of stop orders. I can tell you that there were not too many happy cocoa traders on Friday.

Friday’s session was dismal at best, no doubt due in no small part to Thursday’s session. Volume and open interest are both off as well which would suggest that the trend doesn’t have a lot of support; however prices are resisting going lower all the same.

I would like to buy this market; however we really don’t have a good level to enter off of right now. We’ve got the 50% retracement and weekly resistance above the market at 1700 and I’m hoping that if prices do go higher we will see some sort of reaction here.

RSI is quite overbought, and while this alone is not a reason to short the market, it does suggest that we might find resistance soon. Once we have a resistance level it will be easier to plan another long trade, but until we get the resistance or a pullback I’m standing aside.

Trade Summary

• FLAT September Cocoa

Speaking of countertrend trades, we caught a break in the sugar market last week on a short term move to the downside. Prices fell off right to the 780 support (got as low as 779) before recovering. The little dip in prices was good enough for a $460 profit per contract. Not too bad for a retracement in sugar.

This Week:

I know not to look a gift horse in the mouth, which is why I’m changing my strategy in sugar this week and looking to trade with the trend again. Friday’s session showed us a nice bounce off price and trendline support. RSI is also hooking upwards somewhat which are all good signs that prices may rally this week.

For the short term I would look at buying sugar if the market broke through Friday’s high at 803. While the best place to cover the trade would be below the 780 support area, I’m going to use the intermediate support at 793 to limit risk to about $112 per contract.

I’m not going to push the trade too hard off the start and will consider taking profits at the 850 area, which is a weekly resistance zone. I do think we will see prices continue higher however and will likely see the market achieve 885 before stalling again. Potential profit at the first profit target is just over $500 per contract.

If you are very risk adverse I would suggest waiting to see how Monday’s session unfolds. If prices look bullish on Monday then there is a very good chance that prices will continue to rally. You could still maintain a reasonable RRR simply by using the next profit target at 885 for your calculations.

Trade Summary

• BUY October Sugar above 803
• Exit Order: 793
• Approximate Risk Exposure: $112 per contract
• Profit Target: 850
• Approximate Potential Profit: $526
• RRR: 4 1/2:1
• Degree of Risk: Moderate

The Canadian Dollar continued to chop around last week. Actually most of the currency markets are pretty wild right now, so keep that in mind if you choose to play here. The Canadian Dollar is bouncing around because it is trapped between significant resistance at 7620 and support at 7520. CD rates showed pretty good support on Friday however as the US Dollar had a very strong session. In spite of the Greenback’s strong rally it only had minimal effect on the Canadian Dollar.

While we might see the CD fall off a little this week, the current trend is definitely up; therefore I’ll continue to look for buying, rather than selling, opportunities.

This Week:

To buy the CD long everything will depend on the 7590 resistance line. This line has been blurred for most of last week; however before the weekend we did see rates manage to stay below this area. While this area has been violated a few times I still consider it to be a significant resistance level and would use it to initiate a long position.

RSI has fallen off substantially in the past week which is normally bearish, but as you know, RSI can sometimes show a “retracement” in traders’ attitudes, even though the changes in prices have been minimal. I think that this is what we might be seeing in the Canadian Dollar. RSI is also at a “test point” which means that we should either see a break or bounce early this week.

Buying the market on a break of 7590 I would risk the trade to the next support level at 7570 for $200 risk. There is still resistance at 7620 which we will have to deal with as well as resistance at 7640 which turned the market around the week before. If rates continue higher however, look for profit taking opportunities at the weekly resistance at 7710. Hopefully the 7590 resistance line will prevent us from getting caught on the wrong side of this trade.

I’m going to avoid taking the short trade for the time being; however if the CD falls below the 7520 support zone I might be persuaded to look at shorting the market.

Trade Summary

• BUY September Canadian Dollar above 7590
• Exit Order: below 7570
• Approximate Risk Exposure: $200 per contract
• Profit Target: 7710
• Approximate Potential Profit: $1200 per contract
• RRR: 6:1
• Degree of Risk: HIGH

Silver gave us our pullback to the 626 support area this week; unfortunately it was a week later than we expected! The market has made a nice 50% retracement, spurred on in part by the strengthening US currency. If the US Dollar continues to rally then we will probably see silver prices continue lower; however if the USD falters then we should see silver recover.

This Week:

Silver is currently trading at the 50% retracement of the recent trend as well at a “test point” on the RSI indicator. While it is possible that we will not see a bounce here, it is a good opportunity to enter a trade with a little more predictability knowing that we are expecting a break or bounce.

Since the current trend is still up, I’ll look to continue long with the market on a breakout above the secondary resistance at 650. Entering the market long above here I would risk the trade back to support at 646 before exiting. While this has $200 at risk, it is still a tight trade for a market like silver. Hopefully the market will choose a direction and not look back.

Long term profit target is the larger 50% level at 695, but for the short term I would look for prices to recover to the 680 resistance from a few weeks ago. This relatively small move would have a potential profit of $1500.

Trade Summary

• BUY December Silver above 650
• Exit Order: below 646
• Approximate Risk Exposure: $200 per contract
• Profit Target: 680
• Approximate Potential Profit: $1500 per contract
• RRR: 7 1/2:1
• Degree of Risk: Moderate to HIGH

The Eurodollar fell off slightly last week before stopping us out at breakeven on a bit of a hiccup. The interest rate market is a real mess right now as traders try to figure out if Mr. Greenspan’s assessment of the US economy is an accurate one and whether or not we can expect more hikes in the lending rates.

If interest rates in the US do go higher then we can look for the ED to fall off some more; however the mere anticipation of higher rates can do the same as well.

This Week:

The ED is in limbo right now, which is not too unusual after the semi-large decline in rates last Tuesday. If you’ve been watching the Eurodollar for any time at all you know that it as a tendency to channel after a bigger move, and I think that this is what we’re seeing right now.

The 9718 resistance is going to continue to be an important area for this market over the next couple of days. If we see the ED flinch at this resistance zone, then I’ll probably look at shorting the market as RSI continues to point lower and the trend is “technically” down.

I’ll also be keeping an eye on RSI over the next couple of days as it gets closer to the trendline. Once the market is trading at the trendline we can expect a “test” which will allow us to set up a more predictable trade. If the trend continues lower, look for rates to fall off to the 9702 support followed by the support at 9679 – 9680.

Trade Summary

• FLAT March Eurodollar

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.

Pick #3 – BUY December Silver

This is a bit of a risky trade; however I’m hoping that if prices take out the resistance on the high and the next resistance level they will keep going far enough to clear our exit stop.

Pick #2 – BUY October Sugar

We saw a good reaction to the support at 780 last Friday and might see prices continue higher if they get above the resistance on the high. To increase the probability of this trade wait for Monday’s session to confirm the reaction before entering.

Pick #1 – SELL December Cotton

Summary for the Month of June:

I've been a subscriber for several months, but just lately getting serious about trying to get into the markets. I'm paper trading now and have a few questions. First of all, it looks like Tom day trades, which I'm not able to do. It looks like you position trade though, so I'm trying to follow your lead. Am I on the right track there?

Answer 1:

Kind of. Both Tom and I position trade; however Tom will follow the markets during the day and makes quicker adjustments to his trades than I do. As a result many of his trades have a shorter duration than mine. If you do not have the ability (or the inclination) to watch the markets during the day (I don’t) then you’ll still want to pay attention to Tom’s numbers but you’ll probably have to place a little more money at risk to make the trade work – like I do.

Alternatively, if you wanted to trade like Tom, you will need the help of a very cooperative broker to follow up on your trades, ala Tom’s style. There are brokers out there who will help you in this way if this is the style of trading that suits you best. Tom and I essentially show you two different styles so you can choose the one which is right for you.

Question 2:

Secondly, I'm having trouble matching your S/R and stop/target numbers. Some I get and some I don't see. For example, in the July 21st update, in your Canadian Dollar discussion, you mentioned support at 7450. Is this an exact number? Do you sometimes quote areas instead of exact numbers? Am I trying to be too precise here?

Answer 2:

You’re being too precise. I almost always look at resistance ranges. I’m sorry if I was misleading in the ezine; I’ll have to take more care in the future. If I quote a resistance area and suggest you buy above (or sell below) I will normally have the appendix A amount in my mind. So if I suggested selling below 7450 I would probably plan an entry around 7447, 7446, etc, or whatever suits your risk and your account.

Question 3:

Do you ever set your stops on recent closes, or are they always on an R/S line? Can the Appendix A spreads be used when setting up stops & targets?

Answer 3:

My stop placement depends on how much money I have accumulated. If I’m up a lot of money, yes, I’ll jam the exit stop in a tick or two above/below the close. Many times I’ll get stopped out on the open by doing this, but it’s a guaranteed way to “cash out”.

For trailing stops I normally like to watch the pivot point forecasts for the next session. The traders on the floor use pivots to determine the likely intraday ranges and sometimes this will help narrow my search for appropriate support/resistance to hide a stop behind. If there is no appropriate support/resistance near the pivot then I’ll just use the pivot point, or R1/S1.

Erich

As small traders we are often faced with too many choices and not enough funds to trade them all; therefore it becomes vitally important to be able to spot the best trading opportunities. Below there are two charts. Which trade looks like the better market to trade?

HINT: I purposely chose two markets that we don’t normally trade. Both these markets are notorious for they wild behaviour, so you can rule that out as a determining factor.

Answer:

The whole point of this exercise was to get you to analyze the two markets to determine which market offered the better opportunity. What did you look at to make your decision? They were both good trades, both had decent RRR, but one was a better opportunity than the other. Could you find it?

If you followed the markets during the week you would have realized that the Feeder Cattle trade was the better opportunity. Why? Quite simply, because it had more “ducks in a row”.

1. To begin with you should have taken a look at the longer term charts for both markets. The weekly chart would show you that Feeders were sitting on some pretty substantial support while OJ’s resistance was not nearly as strong.

2. The daily chart confirmed what the weekly showed us, in that August Feeders had pretty good support around the 107.70 area, with the most substantial reaction to this support coming just a couple of weeks before at the beginning of July. In contrast, while OJ did give us a reaction to the resistance at 7060, the resistance was much sloppier than the support in Feeders.

3. RSI was overbought in OJ and sloping downward. This is usually a good sign that prices might take a quick dip to nearby support. Feeder’s RSI had already fallen off and as such you could consider it to be “refreshed”, especially with the slight upturn from the last session (July 16). Remember however that RSI is merely a tool. We don’t trade the indicator. This was probably one of the weaker differences between the two markets and could be interpreted to favour Feeder’s or OJ.

4. The clincher between the two markets, in my opinion, was the trend. The OJ trade was obviously counter trend. OJ is both technically and visually in an uptrend. Counter trend trades by their very nature are much riskier and more difficult to manage than trend trades. On the other hand, Feeder Cattle was strictly a trend trade and as such had a greater likelihood of success.

5. Did you pay attention to the risk amount? This would have tripped up a lot of small traders, as not many of you would be prepared to risk $400 on the “better” Feeder Cattle trade; however, most of you would be pretty comfortable with the $135 OJ trade if it did not work out. While it is difficult to do, try to let this be your last determining factor in judging which trades are worth taking.