Trader Savvy Newsletter

February 14, 2006

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ALTAVEST Tips For The Week 
Name: Michael Sander & Erik Gebhard


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ALTAVEST Tips For The Week 

The futures markets offer a vast and wide array of investment and speculative opportunities.  For example, seasonally the grain markets tend to wake from hibernation this time of year.  Below I've highlighted the soybean and wheat markets because I feel they are going to be very volatile in the near future.  Both are looking to go in opposite directions representing their current situations.  I also mention how cotton could climb to seven month highs and lean hogs could continue in their current downtrend channel.  These markets are a few on the move in one direction or another, with my analysis based off of technicals and fundamentals.  Please remember the risk factors involved when trading futures. 


Cotton has been trading in a large coil formation since the beginning of last year, and some might also classify this formation as an ascending triangle, which in traditional technical analysis can be construed as bullish. Last week mixed data on the cotton market was released from the USDA.  Domestic demand was lowered by .1 million bushels,  with export numbers expecting to stay the same at 16.4 million bales.  Chinese production estimates were at 26.2 million while their import needs were 45 million bales.  Looking over the futures continutation chart there is strong resistance in the 57-58 cent range.  If this market can rally and close above 60 cents expect it to test 70 cents per pound.  

Lean Hogs: 

The lean hog market has traded in a downward channel for over a year.  Recently the market touched the bottom of the channel and rallied  back towards the top near the 65 cent range, hitting resistance.  On the continuation chart the hog market did make a large four cent gap on the upside, suggesting the market will fall to fill the gap.

Kansas City Wheat:

KC wheat projected world stock data for 2007 could be the lowest in 25 years.  Production cuts in former Soviet state countries due to very cold temperatures, and drought conditions in the US sun belt have buoyed prices.  From the November lows this market rallied 40 cents in the first wave up, and in the second wave up the market rallied 70 cents from the low.  The assumption is for the market to pull back before taking off once again.  Bulls target Kansas Wheat at $500! 

May KC Wheat: 


May beans are also trading in a coil, suggesting the market could break out either way.  Even though seasonally, bean markets can rally this time of year, for the time being this market looks more bearish than bullish as a potential head and shoulders pattern is forming.  US exports have reached five-year lows as a result of larger sales out of Brazil and Argentina.  Both countries are expected to have bountiful harvests this year.  Supplies look to be at or near record highs.  A combination of low exports with record supplies would presumably push the market lower.  Look for a possible drop below 560'0 a bushel on the May contract. 

Take Profits When You Can

Commodity trading is not something that just anyone can fall out of bed and do successfully. It requires the proper capitalization, patience, an iron stomach, discipline, time, and most importantly a solid trading plan that not only incorporates risk management, but also allows for profit taking.

Many longer-term trend followers will attempt to stay with a trend for months at a time, for the most part ignoring day to day fluctuations. While this approach to trading has its merits, it also requires full capitalization and lots of patience to be able to withstand the inevitable fluctuations. For those traders who wish to trade on a shorter-term basis, a different entry approach, and more importantly, exit strategy is necessary.

Brokers are constantly surrounded by the markets, all types of traders and many different trading strategies; therefore it’s not difficult for them to determine which qualities separate successful traders from the rest. One of the most common mistakes the novice trader makes is not incorporating a profit taking strategy into their trading plan. For example, trader John Doe might say to me, "corn can't go any lower therefore I want to buy two July at the market, and place my stop at 2.10." This is a valid order, and on the surface seems reasonable. However, note that the word “can’t” is being used, but obviously the market CAN do anything it wants. Secondly, if this client is asked "where would you like to take profits?” the response might be, "I’ll just watch it for now and let you know later”.

One of several events will occur next: 1) The market bottom is plucked perfectly with prices moving straight up and creating a highly profitable position. This is the least likely scenario. 2) Prices hit a new low and the 210 stop is filled for a loss. This is a very likely scenario, as picking tops/bottoms is rarely effective. 3) The market bounces around in a choppy mess, which is quite likely. In this case, with only a stop-loss order in place below John’s entry point and no profit taking orders, he almost has a guaranteed loser on his hands. He will eventually be forced to rollover his loss into a deferred month or he will get impatient and bail out with a loss. By not having an order in place to take profits, he is relying on perfect timing and luck to exit at just the right moment when the market might be favorably higher.

Yes, sometimes an all-time high or low can offer a tempting trading scenario. However, if John was really set on trying to buy a bottom, what John should have also done is place orders to take profits on a portion of his position. In this example, he had two contracts; therefore he could have placed an order to sell one contract for "x" amount of profit. If the market moved in his favor a small degree, he could have banked some profits. Then, he could have tightened the stop on the remaining position to at least break-even. Finally, if after exiting his first contract for a small profit the market moved heavily in his favor, he would have sopped up the gravy with the remaining position.

It’s always best to remove emotion from the equation by establishing your stop AND profit target orders once your entry is confirmed. At that point, there are no more decisions to be made and the market will decide if the trade is a winner or not. The success of a trader also depends on what he does not do. For example, a successful trader will usually not move stops away from the market, or make a habit of attempting to pick tops and bottoms. If all a person ever did was enter a market and place stops, unless the market moves immediately in that persons favor (which doesn't happen often), they will lose on an awful lot of trades, and perhaps deplete their trading capital in a hurry.

Risk Disclosure:

The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose the full balance of your account. It is also possible to lose more than your initial deposit when trading futures and/or granting/writing options. As a result, selling/writing "uncovered" options exposes the seller/writer to the possibility of margin calls and virtually unlimited risk. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results.

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