March 14, 2010

 Chart Overkill

Almost 20 years ago, in my ever ongoing search for “what is the best trade you can make?”, I concluded there was one market setup I overwhelmingly believe gives you the greatest probability of making money in the futures markets. While there are innumerable approaches one can take with the markets, that trade is best described by the following excerpts from our website:

Futures are inherently volatile...and what we are really trading is volatility. All the markets will have periods of sideways action, but all of the markets are frequently trying to move up, or down. Your objective is to be going with them when they are really going somewhere.

Futures are highly leveraged. (usually about 5%).  Get on the right side of something which is truly moving and high percentage gains can be a function of that leverage. It goes without saying that same leverage can also lead to high percentage losses.

Buying Futures Options allows you to be on both sides of the market at the same time.  Just what it says. You can buy options in both directions and whichever way the market goes (if it does move), one side will generally benefit from it, one side will not. Of course, if it doesn't move, neither side will benefit, and you will probably lose money.

AND THE FOLLOWING EXCERPT IS THE PRIMARY SUBJECT OF THIS NEWSLETTER…

Select markets which have done nothing for a long time.   If a market has been trading sideways for quite some time, probabilities "should be" (anything is possible in the futures markets) better it is soon going to move somewhere. Long sideways moves are often followed by large, fast one directional moves.

That last statement did not just come out of thin air…The observation I first made back in 1991 (when I left Merrill Lynch) was that the greatest leverage and the highest possibility of catching a truly sizeable, fairly rapid move was available in markets that HAD BEEN trading in a sideways range for an extended period of time…I also observed that while these same sideways ranges could result in major up, OR down, moves, those moves that happened to the downside tended to be, in my opinion, where you more frequently witnessed the biggest, fastest price changes…

And without any doubt whatsoever, this is precisely what I perceive to be the case today in the entire Soybean complex following the last 18 months of “doing nothing”, trading dead sideways, seemingly forever.

I continue to see being short the soybean complex as having imminent and major profit potential.

Here is a further look at the Soybean and Soybean Oil charts that I have posted SO many times in the last year…Following these two charts you will find some historical examples of charts from the past 20 years (all sideways ranges that broke to the downside) that you will easily recognize as being fairly identical to what we are seeing in the soybean complex today… As you look through these charts,  I am sure you will see the obvious similarities between all of them and what Soybeans and Soybean Oil look like today. I should also note that just because all of these examples resolved themselves by trading sharply lower does not automatically mean the same will happen with the soybean complex. Putting it another way, every sideways range does not end by going south. Sometimes they end by taking off on the upside…BUT they Do all finally go one way or the other.

The truth is, there are 12 historical charts here but I actually have 35 examples of these sideways ranges, all of which I have posted on the website and can be accessed by clicking on the following link: http://www.crokerrhyne.com/newsletters/03-12-10.htm If the link does not work, go to our crokerrhyne.com website and you will find it in the Newsletter Archives as “March 12, 2010, Historical Study, Sideways Ranges that traded lower”.

So here is the present…

Here are examples of long sideways ranges that ended by falling quite sharply. I have noted how long each market was consolidating sideways and then the size and timeframe of the sell off that followed. There are 12 examples here. If you want to see more (35 total), the following link will take you to them on our website. Believe me, they are all well worth a look… http://www.crokerrhyne.com/newsletters/03-12-10.htm

Just to be sure my labeling of all these charts makes sense…In this first chart, March 1999 Cotton, the market basically “did nothing” for 18 months, then finally fell through its lows and lost 19% of its value (from its old low) in 14 week’s time.

Again, if you want to see about 3 times this many historical examples (you should do this), the following link will take you to them on our website: http://www.crokerrhyne.com/newsletters/03-12-10.htm

OK…Here is the July 2010 Soybean chart again…See any similarities?