E-zine Thingy and Chart Study for October 10th, 2000

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Chart du Jour

See the cup and handle (aka table top) formation on the hoggy chart? Since all Mikey's test drivers and papertrading students are getting this for tonight, I thought I'd include the hog chart that he mentioned he'd like to #7 yesterday, so you can see what he was looking at.

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Question for Today

How would you "qualify" a trade and then name the steps in "your" trading plan?

I am not currently trading. The #1 rule is not to risk funds you can not afford to lose, and having just started my own business, I do not have risk capital (plus I have a 3 year old son, and a 6 month old daughter who need to be fed). But, here is what I would advise.

The very first thing one should do is ascertain the fundamental outlook, the
big picture. How much supply is on hand? How much demand or usage is expected? What will be left over, and how do these levels relate to historic norms? If the supply situation is tight (low supplies relative to usage) then one should look to be a buyer. If supplies are plentiful compared to usage, then one
should look to be a seller. If supply and usage are near historic norms, then
one has no real bias, and should trade either long or short based on technicals.

Personally, I think one should also establish levels of "cheap" and "dear" for the particular market as well. A great way to do this, IMHO, for the grains is the Stocks to Use ratio.

The second thing one should look at is how the contract has acted historically
this time of the year, and why! For example, Winter Wheat typically rallies in
October due to planting scares (too hot/cold/wet or dry). Before the normal
seasonal tendency, one should look at the current situation and see if the normal reason could hold true this year. For wheat, a planting scare wouldn't be such a big deal due to the large amount of grain left over from last years crop (Ending Stocks). So, if we lose a couple of bushels this year, the impact wouldn't be huge. If no real seasonals are present, don't count the bias here either.

Once the background for the trade is in place (fundamentals and seasonals),
one should look at the charts. Identify support and resistance. Only trade in
the direction of the bias. Only consider anti-bias trades if the market is in
a "cheap" or "dear" value area. For example, Dec Wheat is cheap at 255, and
especially below the August lows- based on historical analysis. Hence, with the coming planting and the cheapness of Wheat, the violation of resistance at 257 on 09/27 saw the technicals and fundamentals line up.

Only take long positions when resistance is violated. Only take short positions when support is violated. Though stops do not guarantee to limit your losses to a specific amount (fast market conditions, gaps, limit moves, slippage, etc.) use them. On long positions, a stop loss should be placed at support; stops should be placed at resistance for short positions. Using our Dec. Wheat example, the closest support was 252 1/2 established on 9/25 and 09/27.

Be prepared to move your stop in the direction of profitablility quickly. Set a time frame... if the position is not profitable in 7 days, exit (7 is just an example, but I like 7 days). After 7 days, the stop should be moved to break-even. If support or resistance manifests itself before that, move the stop in the direction of profitability. Back to our Dec Wheat, with support established at 263 on 10/03, we have a stop moved up and hopefully ensuring a profit after the broker is paid, as well as slippage and the like.

Now I consider myself a fundamentalist first, and a technician second. I am SLIGHTLY biased in that I am working on a Grain Traders' Almanac to help traders learn the fundamentals and apply them ( no fancy regression BS, just plain and simple useful rules to help you develope a bias towards direction and to discern value). But, IMHO, using fundamentals in conjunction with solid technicals is like what Ted Williams does.... Under these circumstances, we try to exert a Ted Williams kind of discipline.

In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his 'best' cell, he knew, would allow him to bat .400; reaching for balls in his 'worst' spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging
indiscriminately would mean a ticket to the minors.

The fat pitches may be situations where the fundamentals and the technicals
line up, while swinging at any old pitch means going broke.

Mikey, aka Mickey, does a great job at showing you how to enter a market, and
manage the trade using support and resistance. Combining these methods with a
solid understanding of the fundamentals may help you go from corporate softball to the majors. At least, I hope so!

Scott posted at Commodity Cafe

I write down all of the true ranges for all of the 8 markets I am trading... coffee, natural gas, bellies, heating oil, S&P, bonds, silver, platinum. Just after the open, in each market, I mark the distance off on the screen of 80% of the prior days range up from the open and down from the open and set the alarms. When an alarm comes in, I pick up the phone and buy the market if it is going up or sell it if it is going down. I put in a stop at a 75% retracement of the wave that got me in (see hourly chart for this). If long I note the high for the day and hold over night. On day two, I repeat everything I did for day 1, but I also watch the market I am in and take profits at yesterdays high. I put my stop just under yesterdays low. If the market continues, I reserve the right to jump back in.

I see a symmetrical triangle in an uptrend. It is made of a five wave pattern. I calculate the risk and see if it is 4% of my account or greater. If it is greater, I don't trade. I put an order in to go long above this triangle, one tick over the last swing high. If filled, I will put in a stop loss just under the last swing low. If the risk is 4% of my account, I look for 1:1 risk reward as my profit target. If the risk is 2% I look for 2 profits per one risk. I can use a limit order, an MIT or a market order for profit taking.

A simple cause and effect lesson to help us remember what the heck we're
doing.

Activity: If retail prices rise
Market Result: Down
Reason: Indicates stronger economic growth. Fed may have to tighten.

Tip du Jour is courtesy of Jim McKane a Registered Futures Broker

Here are some tidbits of info about October, and the October Crop Report.

Do note that these are tendencies, and what has happened historically. Just because something has happened in the past doesn't mean it will happen again in the future. Be sure to read the disclaimer at the end! You guys and gals know the routine... Past performance is not neccesarily indicative of future results, etc.

Corn
For the month of October, December Corn has been up 8, down 10, and unchanged 1 in the last 19 years. Total change for the month in the last 19 years.... +5 1/4 cents. Following a strong September, like we had this year, December Corn has made a higher monthly high 5 of 6 times, with an average gain of 8 cents in October (average gain would put Octobers settle at 205 3/4 basis the December contract).

The USDA has underestimated Crop production 12 of the last 18 years versus the final crop estimate, which may be slightly bullish.

Soybeans
For the month of October, January Soybeans have been up 10 and down 9 times on a settlement basis in the last 19 years. Since 1982, September has seen January Beans rally 7 times and break 12 times in September. Following the down Septembers, like we had this year, October has seen January Beans continue to break 7 times, losing an average of -9 1/2 cents on a settlement basis in October. 9 of the 12 weak Septembers, have seen lower monthly lows in October than September (watch the 492-0 level).

USDA has under estimated usage in 13 of the last 18 years in the October report versus their final estimate. They have over estimated Ending Stocks 14 of the last 18 years. This may not be a good combination, and could weigh on prices.

Wheat
The most bullish of the grains, as Winter Wheat (CBOT Wheat & KC Wheat) are in the planting stage of development. Lost of things can wrong at planting, and as a result prices have tended to rally, as planting problems can lead to serious crop loss latter.

December CBOT Wheat (wheat) has finished the month of October higher 12 times, and lower 7 times in the last 19 years. A Total gain for the month of +24 3/4 cents in the last 19 years, this is the 4th strongest month on record for Wheat. September has seen Dec Wheat rally 12 and break 7 times as well in the last 19 years. Following all 7 of the September breaks in the last 19 years, December Wheat has made a lower low in October, which may equate to a break back down to 246, basis the December contract, before the end of the month. The average break following a weak September has been -11 1/2 cents, on a settlement basis in October.

USDA has been fairly evenly disperced on guessing the crop, with no real biases present.

Summary

Don't expect too much from the October report. Corn and Beans are being harvested (or been), and as such volatility in these markets should dry up.

Look at Corn and Wheat as possible "Mikey's Reversal Thingy's" for paper trades. Both are in up trends short term, and may be dragged down.

This years crop, though smaller than originally forecast, is still a big'en. My feeling is that the lows are probably already in for Beans, but I am questioning Corn and Wheat.

Hope this helped put the report and current grain markets into some type of perspective for everyone. Remember that history never repeats itself exactly, and conditions change. But as speculators, we need to be able to judge the current environment, and then adapt to any changes.

Scott
My "Cards" on the Table: I am the owner of a small research firm, Commodity Futures and Equity Analytics, LLC. Yes, I sell things, and yes I hope that my posts are both helpful as well as good marketing. http://www.grainguide.com

Disclaimer: The risk of loss in trading futures and options can be substantial, and may not be suitable investments for all individuals, and individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option would result in a futures position. The data contained are believed to be reliable but cannot be guaranteed as to reliability, accuracy, or completeness, and as such are subject to change without notice. CFEA will not be responsible for anything, which may result from reliance on this data.

Break-Even Analysis
A calculation, used by a company, of the approximate sales required to just cover costs or break-even. Break-even analysis considers the relationship between profit, fixed and variable cost. Ergo, if it ain't breaking even, why are you considering buying it's stock?

ARIES (March 21-April 19): This is a wonderful time to sell the family, the house and cottage. Making these changes will enhance your trading account. Don't be afraid to try new things, just don't get caught in that position.

TAURUS (April 20-May 20): Romantic opportunities will be plentiful if you get out and mingle, throwing around some cash can't hurt either. You will be extremely sensuous, but don't take unnecessary risks. No glove, no love.

GEMINI (May 21-June 20): High energy at work will aid you in getting projects finished, as usual, your boss will take the credit. You can use your added discipline to learn new skills, like dressing yourself for instance.

CANCER (June 21-July 22): Plan some short or long trips or don't. Past romantic partners will find their way back into your life, they've heard your lies about striking it rich in futures. You will want to broaden your awareness, so open up your other eye. Pick up some reading material to help you search for truth or squash flies with. The latest trading course will do fine.

LEO (July 23-Aug. 22): Don't argue with relatives who are conservative and outdated, you don't want them disinheriting you. It is best to do your own thing without drawing attention to it, especially if it's illegal. A new relationship can be yours if you get out with friends and have enough cash to purchase one.

VIRGO (Aug. 23-Sept. 22): New friendships or romantic encounters will develop through social events such as trading seminars; they're all gold diggers, dump them. You can make substantial changes to your appearance, plastic surgery has become more popular over the years.

LIBRA (Sept. 23-Oct. 22): Look into career possibilities involving managed futures. You've wanted to make changes for some time. Your creative talent can be put to better use and you will be able to mismanage clients funds with the best of them.

SCORPIO (Oct. 23-Nov. 21): You will have an unusual approach to life, it's called suicidal. Travel by water will be interesting and educational, especially if you can't swim. You will thrive on the cultural aspect of your ventures. Defraud a foreign trader.

SAGITTARIUS (Nov. 22-Dec. 21): Be careful not to ruffle feathers, no point in pissing them off if you're not done using them yet. It is probably best to put your efforts into making money. Personal partners won't be easy to please, so don't even bother trying.

CAPRICORN (Dec. 22-Jan. 19): Spend time with friends or relatives you respect. You will get some good ideas if you listen to those gurus who have experience, ignore everyone else on the forum. Observing others will be enlightening, there are those who will lose even more than you will.

AQUARIUS (Jan. 20-Feb. 18): Changes in your relationship will affect your home life, not everyone is into whips, chains and leather. Avoid getting angry with your lover, get angry at your spouse instead.

PISCES (Feb. 19-March 20): Concentrate on getting even with others. Don't get involved with the personal problems of friends or relatives, it's not your fault they are poor. Look into interesting ways of investing in your future, steal from the kids college fund.