Only nine days left until Christmas and I’ve already finished my Christmas shopping; including sending the parcels off to out-of-town relatives and everything. Wow, I think this is a first for me. It’s just not going to be the same this year though: not running around the mall at the last minute with all the other husbands, I’m going to miss it. :-)

There is still one present to go out however, and that is the one to all our readers which I mentioned in the last couple of issues. Since the markets get too thin and unpredictable over the holidays this will be the last regular trading issue of the ezine for this year. In its place however, next week we will send out our Christmas gift to all our subscribers. I really hope you like it. It is something that has worked for me in the past and I hope it will be useful for you as well.

If you are not currently subscribing and would like to receive this special edition, just send an email to shaggy@xtn.net with the word SUBSCRIBE in the heading and we will make sure you get it. One other reminder, that Gecko software, the makers of the Track ‘n Trade software which I use in the ezine, is offering a $20 discount on purchases made before December 24th. You need to quote a special code to get the discount, so email me at ErichTHT@hotmail.com if you are interested and I will send you what you need to know.

On behalf of Shaggy and myself, I would like to wish you, and your families, a safe and happy Holiday season and the best wishes for a prosperous New Year. Look for the next regular issue of the ezine on January 5th, 2003!

Enjoy this week’s issue.

Erich

Corn prices pulled back last week off the support at 235 before encountering resistance at 241. Volume and open interest picked up slightly on the pullback, indicating that prices might be trying to rally in spite of the fact that seasonally speaking, this is usually a very bearish time for this market. While corn is still locked in a downtrend the current resistance level will tell the story of what will happen next in corn.

If corn can post a close above the current resistance at 241 look for prices to continue to rally to the next resistance level at 245 followed by more resistance at 249 ½. If the market did manage to rally this high, there is some pretty serious resistance at 258 ½, just slightly below the 62% retracement level which will likely hold it back.

If the current resistance at 241 holds, look for the market to retreat back to support at 235. Just below here however, the bears run out of room fast as there is significant daily, weekly and monthly support found at 230. If the market should break this support level there is more support fairly close together at 228 ¼, 225 ¾ before encountering the contract low at 224.

Cotton gave us a rather large pullback last week getting as high as 5080 before encountering resistance. From here the market began thrashing about making some pretty big and dangerous ranges. It is difficult to say exactly what the market intends to do from here as it has simultaneously bracketed the resistance at 5080 and support near the 50% level at 4840!

The long term trend is up as it appears that the market is attempting to eventually complete a 38% retracement of the downtrend which lasted for most of 2001. In the short term however, the market might continue to bounce about as it searches for direction.

A close above the current resistance at 5080 would likely see cotton continue higher to test the resistance at 5130 and eventually 5180. If the market can get above here it would have a good chance at completing the long term retracement at 5250.

Just below the current market lows is the 62% level at 4914. There is some support around the 4870 region which the market would have to clear before it could once more attempt to break through the 50% level (4830) and the support below it at 4800. If the market breaks through this level the next stop seems to be the 38% level at 4746.

After continuing to channel for the early part of last week, beans gave us a nice bullish break out of the channel. Although the breakout was accompanied by an increase in volume, the market only managed to get as high as the resistance zone at 577 - 580 before halting. Although the market appears to be trying to continue the longer term uptrend, the resistance in the 580 region has turned the market back before. Once the market closes above 580 by a comfortable margin we should see prices continue higher to the next resistance level at 587 before attempting to breach the contract high at 593 ½.

If the 577 – 580 resistance turns the market around yet again, look for initial support to be found around the 62% level at 564. Below here is also the 50% at 577 ¾ which was also the bottom of the channel formed a couple of weeks ago. If prices decline far enough they might also test the 38% level around 550 ½ as well as support just below it at 545 and 540.

Next issue we will focus our attention on the March contract.

Last week saw cattle prices pullback enough to cover the gap formed during the rally from the middle of last month. From here prices found support in the middle of the gap at 7710. While the ranges of the last two sessions are not technically long enough to be called a channel, they are nearly exact; therefore we could use the ranges to bracket the trade for next week.

The top of the range is the resistance at 7795. Once above here the next resistance level the market would encounter is at 7840 before finding the contract highs at 7965 and the long term resistance located just above that level at 7980 – 8000. Since we are trading off the contract highs however, we will want to be on the lookout for the possible formation of a #3 point, part of a 123 reversal pattern, which might develop later in the week.

Should the current support of 7710 not hold however, look for prices to continue to slide to the next support level at 7630. Below here the market will once more find support at 7555 and possibly even 7440 and the 38% retracement level just below that at 7422.

Cocoa continued to climb last week breaking through the 50% retracement level and filling the gaps located just below the 38% level before retreating and settling on the support at 2008 just below the 50%. The market is currently making several formations at once. David Duty’s students might see a reverse blip formed during the latter part of the week, while others might interpret the formation as a channel or the neckline of a rounded bottom.

Since the market is trading near the 50% level it is difficult to pin point the next direction it might take; therefore I would be inclined to see the formation as a channel. The upper end of the channel is the resistance near the 38% level at 2120 and the bottom of the channel would be the current support at 2008.

If the market breaks through the bottom of the channel look for the market to try and make a 50% retracement of this last move. This should see the market try to retrace to around 1888. There is not a whole lot of support found here; neither on the daily or weekly charts, but it is the 50% level so you have to respect it. Before the market can head to the 50% however, it will need to contend with the support at 1970. If the market retraces to the 50% and breaks through the next support level can be found at 1790.

Should the market break through the top of the channel/rounded bottom, it should continue higher to fill the gap at 2190 located just above the 38% level. If it does not reverse out of the gap, the next resistance is at 2248 and 2310 before being in a position to possibly challenge the contract highs.

Sugar prices rallied off support at 715 last week getting as high as 760 by the end of the week. The market has now completed at 123 reversal formation and might be setting up for a run at the daily 50% level at 654. Declining volume and open interest figures indicate that the uptrend could be running out of steam and we might see prices head lower next week.

The first significant barrier to the downtrend will be the support at 715. This level has been a thorn in the bear’s side for several weeks now as the market does not want to go below this point. Look for a decent close below this level before turning the market over completely to the bears. The next support below here is nearby at 707, followed by still more support at 692 and eventually the 62% level at 687.

If the market continues to the upside, look for support immediately above Friday’s high at 765. Beyond here it seems to be clear sailing until the recent contract high of 789. If the market manages to set a new high, look for resistance from the long term charts at 810 and 820 to come into play.

The Franc rallied nicely last week thereby completing two rounded bottom formations, a long term and a short term, with the market currently trading at the neckline of both. The key to this sometimes temperamental market is to make certain we get a closing price above the neckline before we commit to a long position.

There is a bit of room to move if the market gets above neckline with a possible target looking like the 7080 level, but make sure that the market can close above the current contract high at 6980 before committing. This is a very significant high as it has capped the upside of the market for over four months now. If the market does continue higher, look for the next resistance to the upside to be found around 7170.

If the neckline holds and the market once more retreats into the large trading range that has held prices back since last August, look for the market to first test nearby support at 6848. Below here there is more support at 6817 which is also near the 50% level of the last uptrend. If prices continue to slide, the market might attempt to retest the support at 6770 and 6720 before encountering the recent lows at 6688.

Silver prices rallied hard last week, punching through upper resistance before finally encountering the weekly 38% retracement level of the last six month downtrend at 480.50. In spite of the large gains of last week, the closing prices are still trapped in a relatively small range of resistance between 471 and 475. Monitoring which side of the range the prices close could be a good indication of where silver is heading next.

While there is a little support below the current low at 465, the more substantial support is to be found at 461. If prices continue lower still there is more still more support to be found at 455 - 456 which should hold the market up. If the support here fails, then there does not seem to be too much in the way of keeping the market from testing the support at 449 as well.

If prices continue higher there is resistance just above Friday’s high at 485 followed by more resistance at 490. Actually the resistance up here is spaced somewhat evenly, with more resistance found again around 494 and 498. Evenly spaced resistance is something which seems to be fairly characteristic of the silver market.

The results of the survey seem to indicate that most people prefer to trade fewer markets at one time vs. more. I would have to say I agree with that assessment. I have found that for me, trying to properly manage more than three markets at one time is very difficult. Different markets are doing different things, requiring different decisions, all at the same time!

While the number of different markets you choose to trade at one time is purely a personal preference, the problem of trading more markets simultaneously compounds itself geometrically as your trading time frame decreases arithmetically (huh?) In other words, if you have a longer term focus on your trades, it is a little easier to manage more markets than it would be if your trading focus was only on day trading.

For the small trader the difficulty comes not in trading multiple markets, but in choosing the best markets to trade. Many times the small trader will get into a trade only to discover a better opportunity present itself in a different market the very next day. It is very tempting for the small trader to overextend themselves and try to trade both markets at the same time. While it can be done, it is usually a strain on both the trader and their account, especially in the event that one, or both, positions move against them.

Learning to choose the best trading opportunities involves learning patience with the markets. Opportunities abound most days, but not all the opportunities are worth taking. Learning to figure a proper risk/reward ratio is the first step in choosing the best trades. If a market can not at least give me 2:1 risk/reward then I will most certainly pass on the trade. Obviously a better trade would offer even a higher risk/reward ratio.

Likewise if the market requires too much risk, or demands me to place more at risk than I am comfortable with, I will pass on the trade. Many traders fall into the trap of assuming more risk than their accounts will stand.

The general rule of thumb is that you should not have more than 5% of your account at risk at one time. While this may be sound advice for a larger account, it is not really relevant for the small trader who must regularly put a higher percentage of their account at risk in order to take a trade.

While the percentage rule of thumb might not apply, a general guideline for the small trader is to avoid having more than $300-500 at risk during a trade. This level will allow them to avoid the daily ranges of most markets while still keeping their risk to a minimum.

The final step in learning to identify the best market opportunities is to realize that there are three positions a trader can have in the markets: long, short or flat (out). Too many traders feel that they have to be in the markets all the time and are therefore constantly looking for either a long or short position. It is important to recognize that the third option, being flat, is as legitimate a position as the first two.

Being flat allows you to watch the market set up so that you can best take advantage of the market when it is ready. This is what traders mean when they tell you “not to chase the markets.” It is important to learn to wait for the markets and let them come to you. Then your job as a trader is to be ready for them.

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I’ve noticed that some markets seem to lead others, is that correct?

There are relationships between some markets, as your question pointed out; however, these are only loose relationships that might hint to the direction a related (or unrelated) market could take. While it can be helpful to know about these relationships, it would not be valid to use this relationship as a primary decision making tool.

For instance, it is well know that there is an inverse relationship between the grain and meat markets. Knowing this relationship between these two markets exists can be helpful in calling the next direction either market might take; however we would not trade these markets based solely on this relationship since it is not as reliable as following what is happening in each particular market, regardless of the relationship.

Even markets within a certain category do not always behave the same. For instance in the grains: wheat, corn, oats, beans and meal might all be going one direction, yet bean oil could be moving contrary to the other grains. You will find that this is the case for most commodity categories, there will be a predominant trend among most of the markets within the category, but one or two will always be moving in the opposite direction.

Knowing these types of things help round out your trading education, but to answer your question, you should only trade a market based on what you see in that market, and use things like relationships to other markets to back up your trading decisions.

Erich