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Trader Savvy Newsletter


August 22, 2006

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Golden Trading Opportunities

Name: Jim Wyckoff

Company: Man Financial

Learn More About Today's Author
Years Trading: Over 20

Favorite Movie
: The Outlaw Josey Wales
A note from the author:

Hello Trader Savvy readers. I want to thank the fine folks and Trader Savvy and at Man Financial for giving me the opportunity to show you some of my latest work. Below is my latest bi-weekly newsletter, in which I take a longer-term technical view of selected key markets. Included are my unique analytical charts.

Jim Wyckoff

Jim Wyckoff's Bi-Weekly Newsletter

Crude Oil: Veteran traders know "smart money" follows market trends. Indeed, the market adage, "the trend is your friend" has made many a trader wealthier over the years. In the crude oil market, the trend has been for fundamental events--both expected and unexpected--to support rising prices the past seven years.

The latest supporting unexpected fundamental in the crude oil market is the shutdown of a major BP oil pipeline in Alaska. Just before that it was a marked escalation in fighting between Israel and Hezbollah. Before that it was Iran and its nuclear ambitions. Last year it was Hurricane Katrina.

Nearby crude oil futures prices at the New York Mercantile Exchange are in a steady seven-year-old climb from the December 1998 low of $10.35 a barrel. Last month, the nearby NYMEX crude oil futures contract hit an all-time high of $78.40 a barrel. The farther out, or deferred, crude oil futures contracts have hit levels above that mark.

The monthly chart for NYMEX crude oil futures shows a steep price uptrend from the 1998 low is still firmly in place. There are no longer-term technical chart clues to suggest the steep and strong uptrend in crude oil prices will end anytime soon. Remember that the trend is your friend in trading markets.

To underscore the strength of the uptrend in crude oil futures prices, the Directional Movement Index (DMI) technical indicator overlaid on the monthly crude oil chart shows a present ADX line reading of 33.83. Any ADX line reading above 30.00 does suggest a strong price trend is in place in a market.

An important aside is the fact the Continuous Commodity Index (CCI) just this month hit a fresh 25-plus year high, which also bolsters the notion that it's unlikely crude oil futures prices will set back significantly any time soon. The CCI is a basket of raw commodities prices rolled into one composite price index. The index is watched very closely by traders in all markets, and is an excellent gauge of overall raw commodity price inflation in world economies. In other words, raw commodity price inflation is at its highest level in over 25 years--led by the rise in crude oil prices.

With strong economic growth in China, India and in other industrialized countries, it's not likely demand for raw commodities, including crude oil, will subside, but will only continue to grow. Raw commodities market bulls are presently basking amid a worldwide tightening of supply and demand ratios for many raw commodities.

In crude oil, from a geopolitical perspective, there are industry veterans who argue there is anywhere from a $10.00 to $30.00 a barrel "risk premium" built into the crude oil futures market at present. This means added value has been put into crude oil prices because of geopolitical uncertainty--be it Middle East, African or Venezuelan tensions, or the general threat of terrorism acts against energy infrastructure facilities around the globe. Don't look for this added risk premium to abate any time soon. There will always be some degree of a risk premium built into crude oil futures prices.

Interestingly, crude oil market bears can correctly ascertain that any major terrorist attack against a major world economy could produce an immediate sharp drop in crude oil prices. Reason: The possible sharp reduction in demand for jet fuel, gasoline and other energy due to consumers suddenly tightening their belts and staying home, for at least a short period of time, following any such terrorist act.

Bottom Line: Bulls will continue to enjoy the solid longer-term technical advantage in the liquid energy futures markets. Look for the nearby crude oil price--which at present is the September futures contract for the NYMEX--to trade in a range at higher levels--bound by overhead technical resistance at the contract high of $76.52, and by solid downside technical support around or just below $70.00 a barrel. Multiple closes in nearby crude oil futures below $70.00 a barrel would produce some near-term chart damage.

However, any escalation in the present Middle East crisis, or a terrorist attack on a major oil installation--such as has been attempted in Saudi Arabia--will most certainly spike crude oil futures above the $80.00-a-barrel price level--and possibly even close to $100.00 a barrel for at least a short period of time.

U.S. Treasury Bonds: It was a very good week last week for bond market bulls, in the wake of two bullish U.S. inflation reports. The bulls have fresh upside near-term technical strength, and are showing some signs of longer-term strength, too.

See on the weekly continuation chart for nearby U.S. Treasury bond futures that prices have poked above one downtrend line, seen on the chart. See, too, that a potentially bullish double-bottom reversal pattern has formed on the weekly bond chart. There is a very strong resistance zone on the weekly chart that is located at the 109 even to 110 even level, basis nearby futures.

If the bulls can produce multiple closes above strong longer-term chart resistance at 110 even, then that would provide them with better longer-term technical power to continue the recent uptrend.

My bias is that the bond market has put in a major low and will trend sideways to higher in the coming weeks. And remember that with the geopolitical tensions always a factor in markets, the "flight-to-quality" phenomenon is always just around the corner to benefit bond market bulls.,

Dow Futures: The stock index bulls provided a summertime surprise by showing solid upside strength last week. At a time when many traders are on vacation and when volume tends to shrink, the bulls are on a mission heading into the critical months of September and October, when trading is more active and can be unkind to the bulls.

See on the weekly continuation chart for nearby Dow stock index futures that prices are still in an uptrend, but have entered into a sort of "no-man's land" resistance zone that has turned back rallies in the recentpast. If nearby Dow futures can push above solid resistance at 11,400, and see multiple closes above that key level, then bulls would gain solid upside longer-term technical momentum to continue the uptrend, or even accelerate it, in the coming weeks, or longer.

U.S. Dollar Index: This week the U.S. dollar index bears have gained some near-term technical strength recently, amid stronger ideas that U.S. interest rates will not be rising in the coming months.

The longer-term weekly continuation chart for nearby U.S. dollar index futures shows that bears also have the longer-term technical advantage. See the downtrend line that is drawn off the 2005 and 2006 highs, and is still firmly in place.

See, too, on the weekly chart for the nearby U.S. dollar index that price action the past few months has formed a big and potentially bearish bear flag pattern. A downside "breakout" from this bear flag--meaning a push below strong technical support at the 84.00, basis nearby futures, would be significantly longer-term bearish and would suggest a retest of the 2004 low of 80.48.

Corn: In the wake of the recent bearish USDA crop production report, corn futures have suffered serious near-term technical damage. And a look at the weekly continuation chart for nearby corn futures also shows longer-term chart damage was inflicted. Nearby corn futures dropped below an uptrend line and also penetrated on the downside very strong longer-term technical support at the $2.20 level, basis nearby futures.

Recent price action in corn has opened the door to a possible challenge of major psychological support at $2.00 a bushel, basis nearby futures. My bias is that there is not much downside potential left in the corn market. While technicals don't look bullish right now, the fundamental side of the equation in corn certainly does not look bearish and does favor the bullish camp.

Soybeans: Like corn, near-term chart damage has occurred in thesoybean futures market. Significantly, soybean futures sold off following what was deemed a bullish crop report for soybeans. Veteran traders know that any time a market sells off on bullish news, that's a bad omen for bullish traders.

The weekly continuation chart for nearby soybean futures shows that no serious longer-term chart damage has occurred recently. However, if nearby soybean futures prices do drop below strong longer-term technical support at the $5.45 1/2 level, then serious chart damage would begin to be inflicted. A drop below that key longer-term support level would open the door to a challenge of major psychological support at $5.00 a bushel. My bias is that nearby soybean futures have a better chance of hitting $5.00 a bushel at some point in the coming weeks or months than does corn hitting $2.00 a bushel.

It won't be long now until soybean traders focus their attention to South American planting and growing conditions.

Wheat: This market has been a follower of corn and soybean futures markets recently, and my bias is this scenario will generally continue, although not in "lock-step" fashion. Like corn and soybeans, wheat futures have also suffered some near-term chart damage the past week.

See on the weekly continuation chart for nearby Chicago wheat futures that recent price action has pushed prices right to a critical technical support level of $3.69. If nearby Chicago wheat futures prices drop below this key support zone seen on the chart, then the bears would gain important longer-term downside technical strength and their next downside price objective would be solid support at the $3.50 level, basis nearby futures.

About Today's Author

Jim Wyckoff is the proprietor of the analytical and educational advisory service, "Jim Wyckoff on the Markets." He has a website at www.jimwyckoff.com and his email address is jim@jimwyckoff.com. (Ph. 319-277-8643)

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