Okay, I admit I’m not much of a poet, but spring has definitely sprung here in the Pacific Northwest. After a very mild winter (even for us) the cherry trees are already sprouting pink buds and the daffodils are beginning to poke through the soil. Spring is without doubt one of my favorite seasons.

I’m not knocking winter, mind you, well not really. Winter is a beautiful season in its own right, but growing up on the Prairies I saw some pretty nasty winters. Four months of freezing temperatures, blowing snow, slush, muck, freezing rain…yuck! Just thinking about it makes me cold again!

So to get away from the harsh winters on the Prairies we moved to the West Coast where the winters are much milder. In the middle of winter in the Pacific Northwest, you can play golf in the valley almost any day or go skiing on a nearby mountain, or both. Now that’s my kind of winter, unfortunately I didn’t get to enjoy it for several years.

As some of you know my wife used to own a property rental business at a nearby ski resort, so every winter I would find myself surrounded by cold and snow again for four months until the ski season ended. I used to joke that I moved a 1000 miles to get away from the snow and here I was right back in it!

Each year we would rent to folks from Mexico, Costa Rica and Australia who had never seen snow. It was truly fun to watch them play in the white stuff. Even the adults were like little kids rolling in the snow, making snowmen, having snowball fights, sliding down hills, etc. Even locals from the valley would make a point of going to the mountain in the winter to play in the snow for a couple of days. I guess it’s different when you don’t have to live in it.

But that’s all a distant memory for me now since my wife sold the business. Once more I can enjoy the milder winter in the valley. Sneak in an occasional round of golf, walk along the beach and work in the yard…yeah, that’s my kind of winter.

For all you poor souls stuck in the Snow Belt this time of the year, you might find comfort in knowing that many people in Mexico, Costa Rica and Australia think you’re lucky to have snow. Wait a minute, on second thought you might not. I know I never did. ;-)

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

Corn seems to have found its bottom as prices rallied slightly last week on building volume. Although it is a little early in the year for corn to begin to rally, the market managed to find support due to a tight cash market and lingering concerns over the future of soil moisture in the western Corn Belt. Judging from the increase in volume that occurred Monday, many technical traders saw the 123 bottom that formed last week as drawn on the chart, thereby shifting the mood of the market from bearish to mildly bullish.

However other traders might have thought the reversal signal a little too tight and as a result we might expect to see the market pullback slightly next week to allow those bulls that “missed the boat” to get on board. If Friday’s high holds look for the market to pullback just a little to support at 237 ½. If this support is violated the market might drop a little further to 235 but it does not appear that the double low of 231 ¼ is in jeopardy at this time.

If the gap above the market fills first, expect corn to reverse out of the gap to find support at 238 ¾. If the market continues its advance the next upside target is the top of the gap of January 8th at 246. If the market closes above the gap it will probably attract more buyers; however there is scattered resistance near here, most notably between 248 and 252 ½ which will probably cause the market to channel or pullback slightly until it finds a good fundamental reason to go higher.

Eventual upside target is the 50% retracement of the recent downtrend at 266.

Cotton prices fell last week apparently due to liquidation by the funds and the expiration of the March options. Technically speaking, a look at the weekly cotton chart clearly shows the market continuing to test the 38% retracement level of the large downtrend that lasted for most of 2001, which also coincides with the current highs of last week.

Now that the market has retreated from the contract highs the question on everyone’s mind is where is it heading next? The first test for the declining market would be the support just below Friday’s lows at 5390. If we do not see the market bounce off this support we can expect it to test support at 5325 where we will likely see a bounce. A bounce off either level should see the market test the upward resistance at 5550 or perhaps even the contract high at 5635.

If the resistance holds look for the market to once more resume the downtrend and attempt to retrace to the daily 50% level at 5230 and the weekly 50% just below it at 5190 as well.

Soybeans seem to be the hardest hit of the grains during this year’s “February Break”. While the wheat complex helped shore up prices temporarily in related grain markets, bearish weather conditions in the South American soybean growing regions helped to push bean prices lower. As a result it looks as though we can expect bean prices to continue to drift lower this week.

There is support just below the current lows of the market at 550 ½. While this might support the declining market I would look for support at 546 to hold the market up. If we do not see a reversal off this level look for prices to continue to the next support found at the recent low of 539. However since we are shortly entering a bullish season for the grain markets I would not expect to see prices continue too much lower at this time.

If beans reverse off the 546 support expect prices to rally to the resistance at 558 ½. Assuming the rally is strong enough we might also see prices continue higher to the resistance level near the top of the trading range at 565.

Despite strong demand by beef packers for slaughter-ready live cattle, futures fell and technical charts continue to point downward. Just as we hoped, cattle retreated from the double top/123 formation we pointed out last week, closing at exactly the same price as the #2 point of the formation, 7710. The decline also came on increasing volume which could be a good indication that the new trend could have some strength behind it.

At 7710, the market is trading on a substantial support level. Just below here we have added support and a gap at 7665 and 7638. If prices continue down to these levels next week we could likely expect a minor pullback in prices as longs liquidate and shorts add to their positions. Expect a pullback to test resistance at 7770 and maybe even 7865 before once again resuming the downtrend. Once the market closes below the support at 7665 the next downside target would be the support found on the 38% retracement at 7500.

Long term target for the bearish move would be the 50% of the uptrend at 7338. For more on April Cattle check the “Pick of the Letter” section of the ezine where you can find additional analysis of this market.

Continued political unrest in the Ivory Coast, one of the world’s largest cocoa producing nations, helped prop up cocoa prices last week. In fact the commercial traders themselves stepped up to the plate and increased their net long positions substantially last week, a sign that the bulls are pretty serious about backing higher prices.

The market is still trading in a rounded bottom formation, or a double top, with the same formation echoed on the weekly chart as well. To me cocoa looks just like a big balloon as traders wait for it to either pop or go higher. The immediate barrier to higher prices is the neckline of the rounded bottom formation at 2395 which coincides with the contract high for May.

A decisive close above this level will likely see the dam burst as traders currently on the sidelines jump on board with long positions; although personally, I’m not sure I would want to be one of those traders. While there is still potential for profit to the long side we are encountering some pretty significant monthly resistance at these levels. Just above the current highs is long term resistance at 2470 and again at 2575.

If the market can continue higher look for more resistance at 2775 before we all need to find charts that go back more than 25 year to reference! Remember that any bullish breakout will need a corresponding boost in volume or it will be short lived. This statement may never have been truer than in this market at this particular time. While the bull trend might not be over yet, those with bearish inclinations are waiting for the first sign of weakness as an indication to short the market.

In fact some bears might already be sensing trouble as secondary indicators like RSI are showing some divergence in the trend. If the resistance at the neckline holds the market back, look for a test of the most recent support at the bottom of the gap just below the market at 2257. A strong close below here would likely send the market down to support at 2170 before we might we a stall or pullback in a falling market.

If the bears take control however, look for prices to retrace rather quickly to the 50% level at 2015, which is what happened last time we were in this situation about four months ago.

Sugar prices soared like a rocket last week after a brief consolidation period. Brazil, the world’s largest sugar exporter, announced that they will committing more sugar to the production of ethanol thereby leaving less sugar available for export. This combined with strong demand for sugar serves to drive sugar prices higher.

The rapid ascent of the market has made it a thrilling, albeit scary ride for the bulls, as the market could top out and reverse just as quickly as it climbed. The high of last week at 772, stopped just shy of the weekly 38% retracement level (775) of the 22 month downtrend which began late in 2000. If that isn’t enough of a threat to the bulls, there is also substantial long term resistance found nearby at 790.

The market would need a decisive close above these highs if we are going to see sugar continue higher to the next resistance at 840. If the market fails to post a close above the current contract high or gets held up at the resistance at 790, then we might expect another pullback in the near future. A retreating market would first test the support found at 716. If this support does not hold the market look for it to continue lower and attempt to fill the gap from January 24th at 685.

Pre-War jitters continue to pound the US Dollar and help foreign currencies like the Euro and Swiss Franc. The Franc set a new high last Wednesday at 7465; however the range of this day resembles a “blow off” top which might signal that lower prices for the Franc are just around the corner.

Technically speaking, almost all indicators are calling for lower prices in the near future as well; however the Franc continues to resist going lower. While I do not see the current bull market becoming a serious bear market at this time, the market seems to be running out of bullish buyers and a close below Friday’s low should pave the way for a pullback in prices next week.

Initial support is found at 7265 and 7220 either of which could send prices rebounding to re-test the resistance at 7415 or the contract high at 7465. If the market breaks through these support levels however look for a test of the 62% retracement level at 7170 to hold prices up. While the bull trend should resume off the 7170 support, if it does not look for prices to attempt a 50% retracement at 7077.

If the current lows hold and prices continue higher next week, or if a bounce off of support finds the market advancing high enough to set new highs, look for rising prices to test the resistance above the current contract high, at 7555 and 7600. Volume has been declining the last few rallies however, so make certain that any new highs are accompanied by increasing volume or the highs will not hold.

Silver prices broke short out of our nice ascending triangle last week when everyone was looking at the market to go long. News of weaker industrial demand due to a weak stock market sent prices plummeting just past the 50% level getting as low as 465.50 before halting. However given the market’s rather quick descent and light volume it is likely that we will see a bounce off this level next week.

While we are anticipating the 50% level to reverse prices next week, if the current lows fail to hold the market back look for the support at 462.50 to hold up the market. 462.50 also approximates the 50% level on the weekly charts. If silver prices do pullback off either the 50% or the 462.50 level look for resistance on the upside as prices approach 483. However, if the bears continue to overpower the bulls next week look for support below 462.50 at the 38% retracement level at 458 followed again by support at 445.

Taking profits always seems to be a difficult decision for new traders to make as they want to maximize the earnings on each trade. I’ve always felt that your profit taking strategy depended somewhat on your account size. For example, if we were trading with a $10 K account instead of a $5000 account, I would have been tempted to let the contract ride through the pending pullback and add to it as the market poked through the next support level.

With a larger account you would be in a better position to absorb the additional risk involved in holding the contract in case you were wrong; however with a smaller account it is imperative that we attempt to grow the account as quickly and safely as possible and in most cases this means banking profits early.

Now that we are out of the market we need to be on the lookout for another opportunity to buy in. Just below the 7710 support we also find more support at 7665 and a gap at 7638. As prices continue downward there is increasing pressure on the market to reverse and pullback a little to allow those traders holding long positions to exit their trades and to allow those traders looking to go short (that’s us) an opportunity to add to their positions.

As such, I would expect to see prices pullback sometime next week, either off the current support at 7710 or subsequent support at 7665. From here I would expect to see prices rally to resistance at 7770 or 7865.

If the rebounding market has a reasonably small range between the highs and lows (+/- $300), I would consider taking a short position below the low of the resistance when it forms and place a stop loss order above the resistance. I would also look to add another short position once the market breaches the support at 7665, assuming that this is where the market formed support. If the market formed support at a lower price, then I would take an additional short contract from below that level instead of the support at 7665.

If the range of the pullback is quite large, then instead of taking a short order from below the resistance of the pullback, I would wait to place an order to enter short with two contracts once the market breaks below the support at 7665, assuming that this is where the market formed support for the pullback. If the market formed support below 7665 then I would place the order to enter short two contracts from below this lower support level.

As the market declines we can probably expect another bounce at the 38% retracement at 7500. While I would like to ride out this pullback it will depend on what the secondary indicators are telling us about the strength of the trend. If the market is slowing or indicators are showing that the market is seriously oversold, we will plan to exit the trade just above 7500 and stand aside to see what happens next.

If we fail to get a pullback at all and the market falls to 7500 then we will have to re-examine the trade to see if it still has potential to make it worthwhile.

-Erich

Tom is attending a seminar this weekend, so we won't get to have our usual Tom-fix.

Your broker should be able to help you interpret things like market reports and make you aware of seasonal trends that might affect any trades you are considering while still allowing you to make your own decisions. It’s not an easy balance for the broker to maintain, but it is important that you find one who can help you in this way.

Essentially you are trying to find a broker who has your best interests at heart, rather than one that is just eager to sell you another contract so that they can make a commission. If your broker keeps calling you with "opportunities", instead of letting you bring the trades to them, then it's a pretty good bet that they're more interested in their success rather than in your success.

Broker fees vary from as little as $15 per round turn to as high as $99, and I've seen good and bad brokers at both levels; however don’t let the cost of commission be the sole basis for your decision making. As with most things in life, you get what you pay for. Don’t expect your broker to jump through hoops for you for $25 per trade. On the other hand, there is a limit to what is reasonable for commissions as well and a $100 round turn broker is likely no better than the $40 broker.

In short you should expect to pay between $40 and $60 round turn for competent service and advice. Commissions are negotiable and dependent on the amount of service you require. A good broker will always quote you a fair commission for the amount of service you require.

Before you choose a broker however, I highly recommend you contact the brokers in our Recommended Broker section. These are gentlemen that Shaggy and I have had dealings with and we do not hesitate to recommend them to you. I honestly believe that you can trust them to treat you fairly and to take good care of you. Collectively Tom, Derek and Kirk have over 50 years of experience in trading the markets day in and day out. You owe it to yourself to give them a call before you make your final decision. I promise you won’t be disappointed.

Above all when you’re choosing your broker take your time. Be picky. After all they are eventually going to become your most important "employee".

Erich

In this week’s spread we’ll be looking at spreading two related markets: corn and wheat. This is strictly a seasonal spread where we are relying on the seasonal tendencies of the two markets to perform “as usual”.

Old crop corn has usually outperformed old crop wheat going into March deliveries. Domestic corn consumption remains relatively high during the cold weather and the market usually participates in a spring rally as river transportation opens up thereby allowing the possibility of more exports.

US Wheat on the other hand, 40% of which normally goes for export, faces stiff competition on the world market as Southern Hemisphere crops are harvested. Therefore ideally in this spread we would like to see the price of corn advance and the price of wheat decline to maximize our spread.

While this is the best case scenario for this spread, it is more likely that both markets will advance, but that corn prices will outperform wheat prices, relatively speaking, as this is what these two markets normally do.

Therefore we would plan to initiate the spread early next week and hold it through February until the first week of March when we would look to liquidate the positions. Profit objective is $400 to $450 per spread.

If you have any questions about the spread or would like to know more about spreading markets, please feel free to call me at your convenience.

Results:

• $500: 13%
• $501 - $1000: 15%
• $1000 - $2K: 25%
• $2K – $5K: 14%
• $5K - $10K: 24%
• $10K: 8%

The result of last week’s survey shows that we have all invested a lot of money in learning to trade better. The majority of traders estimate that they have at least spent $1000 – $2000 on their education, while almost an equal number have spent over $5K to learn to trade. This is not necessarily a bad investment if it actually helps you become a better trader; sadly however this is often not the case.

While I personally believe that ongoing education in trading is vital, you do not want to fall into the trap of becoming an education junkie, where all you do is get another book, or course, or subscription without applying any of your learning.

Learning without application might make you feel like you’re doing something, but really you are not. It is important that you correctly learn to use the tools you already have before you dump your trading system in favour of the latest indicator or method that is being sold. You have no doubt heard that there is no Holy Grail in trading; however this fact has not kept thousands of traders from continuing to search for it.

Do yourself a favour and learn to do the basics well. Paper trade the system you have now to determine how well it works before purchasing another, but most importantly learn to manage your money well as that could be the real difference between your success or failure as a trader.

This week’s question:
Do you use secondary indicators in your trading (ie. RSI, MACD, Stochastics, ADX, etc), and if so how many do you monitor?

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