On that note, some of you have written inquiring about seasonal tendencies or fundamentals in trading. While the majority of traders are technically biased it never hurts to know some of the fundamentals that can drive a market and why. Of all the fundamental information out there the seasonal tendencies of the markets are probably the most important for traders to be aware of, regardless of whether you are a technical or fundamental trader.

All markets have seasonal tendencies; however the most powerful seasonal tendencies are found in the grain and meat markets. To get this kind of information a trader has only two choices: pour over countless government reports and markets estimates; or get a copy of Scott Barrie’s Grain Trader’s Almanac and Livestock Trader’s Almanac. Personally I prefer to let Scott do the hard work and just read his results. ;-)

For anyone even remotely interested in trading the grain or meat markets these two resources are indispensable. Scott literally takes you by the hand and leads you through the year, week by week, making you aware of important report dates, seasonal considerations, like the infamous “February Break”, and important cycles in each of the major grain and meat markets. Knowing anyone of these things can help keep you on the right side of a trade and making money.

If you are a grain or meat trader you should have a copy of these books, especially at this time of the year as we quickly approach important dates in both markets. If you are interested in getting your own copy, you can order a downloadable version (or a print version if you prefer) here http://www.grainguide.com/Order_Form.htm.

Scott has also graciously agreed to give you a $10 discount if you put “Erich” in the note section of the order form. No, I don’t get anything for this…it’s just a way saying “thank you for reading” and giving you a good deal on a valuable trading resource. Check it out. Both books come with a 100% money back guarantee if you are not completely satisfied.

If you have sent me a question lately and I have not responded it is because my computer has been acting up recently. For some reason I was unable to read a few of my emails. I’m not sure what caused it, but everything seems fine now. I always reply to my emails (sometimes I get a little backlogged, but I always reply), so if you have sent me a question and I have not responded, please send it again. Thanks.

That’s it for now. Enjoy this week’s issue.

Talk of another drought this year combined with winter transportation problems getting corn to market resulted in a slight increase in corn prices last week at a time of the year we normally see prices decline. While the market ranged aimlessly for most of the week it eventually turned slightly bullish, gaining both in price as well as volume by the end of the week.

The market halted on resistance at 239 ½ just short of the resistance in the middle of the gap at 241 and while the market appears to be trying to muster up a bullish rally, the lack of serious volume does not make it look to be a very strong rally at this time. If prices continue higher above Friday’s high, look for them to encounter resistance in the middle of the gap at 241 and a little higher at 243 ½. If the downtrend does not resume from here, look for the next upwards target to be at 246.

There is support just below the market at 235 which could support the fledging bull market. If prices break through this support however look for them to retreat to the next support at 235. Below here there is added support again at 225 ¾, but the serious support is found at the contract lows of 224.

A better than expected Government report drove prices higher last week getting very close to testing the recent highs at 5247. The result is that the market has completed a large rounded bottom formation with the market currently at the neckline, which we can use to trade from for next week.

If the market can close above the current highs and resistance at 5250 we should see higher prices continue to the next resistance at 5350. Resistance is actually spaced fairly evenly around here with the next level at 5400 followed by more resistance at 5500.

If the current highs hold, look for initial support to be found at 5080, which should support the bull market. If we see a break of support at this level we might be in for a larger reversal and a test of support at 4925 and 4905. Last stop below here is the 50% level of the October to January uptrend at 4863.

Hot dry weather in the growing regions of Argentina, one of the worlds’ major soybean producers, pushed prices higher last week filling the gap from the week before finding resistance at 575 ½. From here reports say that the funds took profits thereby driving prices lower over the next few sessions.

As a result the market formed a symmetrical triangle formation and is poised to go either direction next week; however given that the recent rally occurred on light volume a breakout to the short side seems more likely (and favourable). If we see a short breakout look for prices to first test support at 549 and the recent low at 544, before testing support at 536 and the bottom of the trading range at 530.

As this is normally a bearish time of the year for beans make sure that a long break out of the triangle is accompanied by increasing volume to ensure it is not a false break. Resistance to the upside is found nearby at 585 followed by the contract high at 593.

Cattle futures climbed higher last week on ideas beef packers would be willing to pay more for slaughter-ready animals for the next several weeks, coupled with reports that the demand for beef remains strong. The market has formed a better 123 top than last week, or what some traders might see as a double top formation. The neckline of this formation is very strong resistance and will require quite a bit of market momentum to break through if prices are going to continue higher next week.

The market is flirting with some pretty substantial highs as just above the current market highs there is weekly resistance nearby at 8130 and monthly resistance at 8200. If cattle prices push above here they will be the highest prices paid for April cattle in over 25 years (which means we’re all going to have to find charts that go farther back than that)!

However, some of the secondary indicators like RSI and MACD are showing serious divergences which could indicate that the current rally lacks the momentum to continue higher. If prices retreat next week, look for initial support at 7865 followed by added support near the #2 point at 7710. A bearish trend could get a little bumpy as there is support above the small gap at 7670 and again at 7500 before encountering support at the 50% retracement level at 7338.

Cocoa prices drove higher last week due to the political unrest and violence in the Ivory Coast, one of the worlds’ largest cocoa producing nations. The volatile nature of the market caused it to pretty much ignore any intermediate resistance levels sending the market to new contract highs at 2420 by the end of the week. If political turmoil continues next week, look for prices to continue higher as well.

The market has currently formed a rounded bottom formation with the market trading at the neckline. This can be seen on both the daily and weekly charts; however we need to consult a monthly chart to find the next resistance level target. If prices continue above the current high they should continue to the long term resistance at 2500 and maybe even 2600. If the market continues the rally it might even challenge the 19 year old resistance at 2740.

Unfortunately the market’s rapid ascent has also made it fairly unstable and even a whiff of a peace agreement between the rebels and government could send prices tumbling as it did last October. While there is support just below the market at 2310 it is very unlikely that this would be able to support anything more than a pausing market. If see a full reversal we can probably expect at least a test of the support at 2200 or 2090 before the market falls to the 50% level of the recent uptrend at 2035.

Sugar futures were vaulted higher last week due to aggressive buying from funds and speculators. Apparently the move stemmed from news that an additional 1.45 billion litres of fuel alcohol will be produced in Brazil this year due to concerns over inflationary pressures caused by rising fuel costs. This will take 2 million tons of sugarcane off the export market at a time when Mid East buyers are actively seeking product.

However after the recent quick rally, the market is in need of a correction since it is severely overbought. The other hint that a pull back is due is next week is from the declining volume that accompanied the sharp price increase. The weekly charts show the market trading just shy of the last retracement line with resistance at 890. While we will in all likelihood see a pull back next week, the question on everyone’s mind is whether or not the bull run, which began last July, has the strength to continue over the long term?

Since sugar is a market that tends to fill gaps, we can probably expect a pull back to fill the small gap left behind in the wake of last week’s trading at 804. If the uptrend does not resume from here, look for the market to test the support at 775 where we would probably expect a bounce. A strong close below this level could jeopardize the uptrend and might send the market toward support at 730, 715 and the 50% level at 702.

A decisive close above the resistance at 890, just above the current highs, should be an indication that the uptrend remains in tact and will continue higher to test the weekly resistance at 930. If the market continues above this level it will have to contend with some pretty serious long term resistance found at 1010.

Continued concerns about war in the Middle East combined with the poor performance of the US dollar, has made foreign currencies like the Swiss Franc very popular the last few months. While we were expecting more of a pull back last week, the Franc traded sideways getting only as low as 7305 on Friday. While the market is resisting lower prices, it is not entirely clear whether or not it has completed pulling back yet before likely resuming the uptrend.

If the Franc breaks the current support at 7305, look for the next support to be found on the previous resistance at 7265. If this fails there is mild support found around 7180, but it is possible that the market would retreat down to support just below the 62% level at 7139, where we could likely expect a bounce.

If current support holds, look for the market to take out the recent contract highs at 7436. Next stop to the upside would be resistance at 7555 which would be followed by resistance at 7600. This is almost an $1800 move above current highs.

Seasonally speaking, February and March are traditionally bullish months for silver as there is a reasonable amount of industrial demand to help support prices. This year the threat of war in the Middle East and a flailing US dollar has also caused a mini-flight to quality for the “poor man’s gold”. The result is that in the last few weeks’ silver has formed an ascending triangle which could hint at higher prices to come.

While silver might continue to range within the triangle for the next few days a close above the top of the triangle at 495 should see prices resume the uptrend. The next resistance above the triangle is found at 503 and 507.50. Above here there is hard resistance at 517 which is just shy of the current contract highs.

Of course if the market breaks through and closes below the bottom of the triangle all bets are off. First support to be tested would be the low at the bottom of the triangle at 472. This would be followed by support at 465 which is just above the 50% retracement level at 462.50.

Unlike most of our surveys, the results from this one were not conclusive. It seems that the readership is pretty evenly divided between those of you who want to leave things as they are, and those of you who would like to see a change in the markets covered from week to week. Unfortunately there are merits to be had by taking either course of action, which makes deciding even more difficult.

We might have to tweak the market mix in the future to offer our readers a little more of both, but in the meantime we might have found a solution that will be acceptable to all our readers, the introduction of the “Pick of the Letter” section.

This is the part of the newsletter where we paper trade a $5000 account, and since our objective is to obviously make money on our paper trades, we will be focusing on the markets that are showing the greatest potential, whether they are a “regular” market or not.

Therefore those of you who like to see the changes that happen in the core group of markets from week to week can do so, and those of you who are more interested in what market happens to be hot can check it out the paper trading section. Who says you can’t have your cake and eat it too? ;-)

This week’s question:
How much do you estimate you have invested in your trading education? I’m referring to educational materials, books, courses, seminars, etc. (not including losses incurred in actual trading).

Send me your responses at ErichTHT@hotmail.com and I’ll share the results with you next week. Shaggy will also put up a survey at http://www.tradershelpingtraders.com/surveys.htm

While April Cattle did not break through the #2 point last week, it did nonetheless perform as we hoped by pulling back to the #1 point and testing the high. This is actually a much more favourable 123 top formation than what we had last week as now we can enter the market below current resistance a put a lot less money at risk. This formation might also be seen as a double top (or rounded bottom) by some traders, and it is also a very powerful formation.

Since April Cattle is showing strong resistance on the highs, I would continue our plan to short this market; however now I would take a short order below the lows of the #3 point and trade it back to the #2 point. I fully expect the market to bounce at this level and I would probably take profits here just to put a little money in our account. There is some support at 7865 which might spoil our plans however, as this maybe enough to prop up a falling market and send it higher again.

Assuming the support at 7865 does not hold and the bounce at the #2 point occurs, I would wait for the market to once again form resistance before possibly taking another order short below the lows of the new resistance level. However I normally only do this if the market has made a large bounce and therefore if the bounce is not very high, or the market seems to be acting unpredictably (ie. large ranges), I would probably forgo this option and rather enter short if the market exceeds the #2 point.

As before, we will place our entry order below the market to make it come to us. Entry will be at 7933 with initial stops at 8033. Our eventual target is the 50% level at 7338; however we must always be prepared to take profits if the market is showing us that it does not want to go any lower.

If the market breaks, and closes, above the current highs by a substantial margin I would remove our order to short the market. I hesitate to take a long position because except for some nearby resistance, there is no reference here for the last 25 years. If the market exceeds this resistance we could be trading all time market highs!

However if there is a topside breakout, it would have required an awful lot of momentum to get through the current resistance and I might consider a long position at that time. First I would wait 1 or 2 days, depending on the closing price of the first day, to make sure the market is not making a false breakout. Then if it looked promising I would place an order to go long above the high(s) associated with the breakout. Stops would go below the current resistance at 8015.

Target to the topside? Once we clear 8200 I don’t know. As I said this would be virgin territory and that alone might keep me from taking a long position. I fully expect the market to retreat from current resistance however; therefore we shouldn’t have to worry about it too much. ;-)

We’ll see how it goes.

I see resistance at the 5.72-5.74 level. Medium support in the area of 5.60 and 5.45. I'm reluctant to trade this market at the current price level. I do think the preferred direction is down. I have a pretty clear picture of 2 of the required 3 "ACTION NUMBERS". The stop goes in at 5.75 ¼ , the target is 5.45. The number I lack is the entry. I think I have to see a break of 5.60 to get me short or a return to a number above 5.70 without breaking 5.73-5.74. Either will do it.

Since I am in a bit of a "no man's land" on the entry right now, but have a down bias, I might consider taking the plunge with a VERTICAL SPREAD. I would most probably look at the July or September Soybean Options but use the March chart for my management rolling to the May, July and finally September for management as they become the front month. Unfortunately I don't see an opportunity for a suitable spread in either month at the moment. I would have to trade futures here. We'll look at this market again next week.

My ACTION NUMBERS are Enter any where above 8.60. The stop goes in at 8.90 and my initial target is a return to the top of the old channel 7.80-7.60. I don't see an option play here. Sugar options are quite dicey to trade. I would confine my view to futures.

Oh Oh … well here's an interesting one. The first instance where I have a view opposite of Erich. As I write this I do not have the benefit of being able to read Erich's analysis only that he is looking for a break out to the upside. For me it depends on what happens Monday. I'm looking hard at the channel from mid December that ended with the breakout down on 1/17 that took us to 49.11 on 1/22.

That move bounced off the major support at about 49.20-25 and took us right back to the top of the old channel … a little break above it, actually. I need a pretty strong confirmation of that break to think long … it sure could happen though. I think the higher probability is that it fails and we go right back to trading in the ranges of the old channel … 52 on the top and 50.80 or so on the bottom. If the break out to the upside does occur my ACTION NUMBERS are a buy at 52.50, stop at 52.00 and a target of 60.00 derived from the weekly chart.

If this doesn't occur then I am a seller at upon the failure with a stop at 52.50 and an initial target at 50.80 with an eye on a possible return to the 49.00 level. For the upside move I would look to May or July options and manage them off the front month contract. I'd buy the July 58 call and sell the July 61 call IF I could get the spread for 100 points or $500. I would risk the trade to half that or $250 plus 2 commissions.

My max profit potential would be the 300 points or $1500 minus the $250 plus commission or about $1200 …a tad less than a 5:1 reward to risk. I would close the spread if March Cotton traded below 52.00 and take profits or roll my stop up if I saw March Cotton trade close to 60.00.

On the downside, I would buy a 56 put and sell a 53 put IF I could get the spread for 100 points or $500. Again I would close the spread risking at most half the $500 or $250 OR I would close it if March Cotton traded 52.50 or take my profits if it traded to 49.00 and probably roll my stop down if it showed any hesitation getting through 50.80. This put spread would have almost the same R/R dynamic as the call spread.

I still like this trade from last week very much. If you got it on based on last week's discussion I would continue to hold it and observe the same management. I would not hesitate to put it on right now if I hadn't gotten it last week. It should be cheaper and yield an even better R/R dynamic than mentioned last week. I will manage it just as I stated last week. 80.20 or so, I am gone.

"When putting on a vertical spread where you buy one option and sell another, is there an advantage to "legging" into the trade instead of putting it on all at once? (ie. the infamous free trade?)"

I am generally NOT a fan of legging into Vertical Spreads or the "free trade" The purchase of a single option exposes us to all the "bad" things about options … time decay, Implied Volatility changes, the "greeks" and to buy outright the "buy" leg of the trade is usually expensive.

What if you're wrong and the market begins going against you? All the power of move against your bias as well as time decay falls on the single option you own. You have none of the benefits of the sold option absorbing some of that power. Put them on together, take them off together. Until next week …

Tom
rtom816@att.net
R.Thomas Loge', CTA
1.800.656.0443

This post is neither a solicitation to trade or a recommendation of any strategy. Always consult your broker or advisor before attempting any trade. Commodity trading involves substantial  risk of loss.

Around the same time that the financial and commodity markets were emerging in North America, the popular sport of the day involved putting a bull and a bear together in a pen to watch them fight it out to the death (who said we were civilized?)

During the course of the fight the bull would get down low to the ground and would move its head up in an attempt to gore the bear with its horns. The bear on the other hand would stand up tall on its hind legs and swat down on the bull from above with its large claws.

Erich

Hello To All,

I would like to thank Erich for allowing me the opportunity to share some market “wisdom” on spread trading and the markets in general. Hopefully some knowledge is passed along that you will find useful when making your way through the jungle which is Futures trading. This issue I would like to cover the basics of spreading.

Spread Basics:

A spread is the simultaneous purchase and sale of two separate commodity contracts. A spread may be the same commodity in different months (May Copper vs. Dec Copper), or different commodities in the same or different months (May Corn vs. May Wheat).

Spread trading is usually considered to be a lower risk strategy than an outright long or short futures position, and therefore margin requirements are usually much less than an outright long or short futures position.

For example, if the price trend of Copper is currently up and you are in a Copper spread, (short one month and long another) the gain on the long position would likely offset the loss of the short position, and vice-versa. One side of the spread typically hedges the other, therefore the lower margin requirements.

Keep in mind that spreads are not guaranteed to be less risky; there is risk of loss in all trading. (Note - not all spreads are recognized by the exchanges and therefore you might need to “cover the margin” for both markets).

Spreads, just like any commodity can be bought and sold at "x" price, and it can be charted just like any other market. A spread chart plots the price difference between the two contracts as seen in the chart below.

Are you asking yourself "How do I make money if I am long and short the same commodity?" The answer is you are hoping to profit from the difference in the two contracts, not from a trend higher or lower in any particular market. With a spread, you follow the relationship, or difference between the contracts, without having to pick a market direction.

For example, if May Corn was trading at $2.40 /bushel and May Wheat was at $3.13 / bushel: the spread would be said to be at 73.00 to the Wheat side, (since that is the higher price). If you entered a CK/WK spread, your broker would simultaneously buy a Corn and sell a Wheat contract. Let’s say you are filled at 73.00

Now, what do you want to happen? You want corn to go up like a balloon and wheat to fall like a brick, but as with commodities in the same complex, this rarely happens. Let's say the next day corn settles at $2.45 and wheat settles at $ 3.15. You have made 5 cents on the corn but lost 2 cents on the wheat. You would have a net gain of 3 cents on the spread.

Fast-forward two weeks (with hypothetical prices), corn is at $2.65 a bushel and wheat is at $ 3.21 a bushel. You could exit the spread and you would have made 12 cents on the spread.

Corn – Long at 245. Sell at 2.65 = 20 cents x $50.00 = $1,000

Wheat – Short at 3.13. Buy back at 3.21 = -8 cents x $50.00 = -$400.00

$1,000.00 – minus –$400.00 = $600.00 profit

If you had entered the spread in the other direction you would be losing $600.00.

The above example is known as an inter-commodity spread; or buying a commodity month in one market, and selling another related commodity in the same or similar month. An intra-commodity spread is buying one month and selling another in the same commodity.

Some of the advantages of spreads are:

1. Typically require smaller margin deposits 2. Underlying market direction isn't important 3. Seasonal patterns exist among spreads

This last point is very important, seasonals play a huge part in spreading, especially in the grains where old crop/new crop price differences come into play. (see below)

Follow-up to last week’s spread trade and/or example.

Concerning the Bean Meal spread, well it certainly didn’t close the week as we would have liked, but as mentioned; the possibility for this to go against us a bit was there. We entered this trade at 11.00 with the idea it was ready to run. As mentioned above, this spread is based more on fundamentals (seasonals to be precise) than technicals, yet we always use technicals with any trade.

This spread settled at 14.10 on Friday and if it opens in this area we may add to our position. Our stop is still around the 16.50 level.

Thanks for reading, I hope by following these trades (for good or bad) it helps to teach you more about the markets. Please let me or Erich know what you would like to see and how I can help. More next week.

Good Luck and Good Trading,