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 January
14, 2007 Commentary (weekend edition)-
And another
incredible trading week goes into the record books. I frequently wonder if the
rise to dominance of the hedge funds is behind why the trading action is so
great, from my viewpoint. I saw some figures on television the other day
showing how much larger, and I mean way, way larger, the total hedge fund
assets are than the average futures market. This implies that collectively the
hedge funds can run a commodity future like it was nothing, and we are seeing
them run all over, like it was nothing. I have said for a long time now
that I just don't see the prices reflecting supply and demand any more, but
just game playing. It does lead to a lot of movement, and I find that a big
plus for trading.
The stock market is just plain strong, and won't stay down at all.
They just keep coming right back in for it. The Industrials have set, I heard,
twenty-four new all-time highs since late last year, and is setting or
approaching many bull market records such as duration, length without a 10%
correction, and so on. This bull is extremely 'long in the tooth', and the
commercials are still wildly short, with small speculators long. The dollar is
on a run, and money is flowing all over the place. Did you do the intermarket
analysis I suggested?
The Euro broke below a key ABCD area, and may
be looking at a much bigger median line lower parallel below (but I'm watching
to see if this is a 'stab fake'). The Pound was incredible, with that surprise
rate hike. This was a hot topic in the forum, as the rise and then subsequent
sell-off came right off a key upper parallel that I had on my chart. The
potential entry triggers on the tick chart for that were truly superb. Take a
look at that one. Did you work up the Canadian? Look at it now. Gold 'did its
thing', exactly as I suspected. I hope you did the work last week. Grains went
crazy, again as I suspected. We'll look at some of this shortly. Finally, did
you see the Russell reaction to that same 60-minute key line we have been
watching, this time from below? Unreal.
I will start with a 'context' chart, and then we'll
look at the chart of the week.
This is the same chart I have been posting
for quite some time. This version is in my February 2006 workspace. I have been
watching this layout, though, almost since I started trading. Recall this is a
two decade channel. Look at the higher timeframe chart, say a quarterly, at
least. Notice how rates move down off the sliding parallel area, right to the
area we started to watch, in advance, by the arrow? Look at those two line
intersections above, and just the overhead area in general. You will see a
'fractal' repeat of what I am watching in the chart of the week coming up.
Recall my thoughts on potential trade premises for rates from previous
commentaries.
Let's go to last week's chart of the week.
I wanted to work on a key concept this time,
and not just show a 'straight up' setup. The higher 'context' we just looked at
has me thinking 'up' for now. This chart shows me an area where an early test
of this premise may play out. Rates 'see' the key line (which I showed in
advance as a previous chart of the week), rolled right down, but then caught
another area of interest and started up. I wanted to see if it headed back up
to the line again (after getting a bit wary of it off this area) and then blow
it out, as I suspected it would if the higher 'context' held. If not, then I
wanted to add that into the mix. I use smaller setups and the subsequent action
there to judge higher timeframe premises.
Let's move on and see what happened
from here.
Rates stalled a little, and then basically
smoked up through the line area like it wasn't there. That's what I want to see
if the higher timeframe 'context' is still guiding the action. The 'best case
scenario' for me is if the line is 'seen', respected, and produces a reaction
to a typical area, and then reacts off that area and takes out the initial
spot, just as we see here. This gives me the most readable and usable action
that I could ask for. Ah, this market sure is something.
Altogether,
though, I am trying to show a common pattern I see repeating all the time. Now
look back to the first chart. Reaction off a big line setup, down to a typical
area, then start up off that. Hmmm. How many times have I shown this in here? I
really wanted to be more subtle and not describe it as I just have, but I
figured I might as well or some may just not get the point at all. I don't want
to cross the line too much, though, from teaching fishing to fishing for you...
Finally, the 'context' guides me as to when I may look for this, and when I may
just play the set as it is laid out.
I'll show the weekly chart here to show you
the detail of why I was looking for the rise in this specific area, and how
that is progressing.
The arrow shows the low area from the
previous chart. See what I mean about moving off a logical area? So far rates
are still moving up nicely from this spot. You see that median line overhead?
Do the work across all the timeframes and find the areas to watch and study the
behavior as this makes a move towards that bigger upper parallel. Rates make
the world go around, so don't underestimate their importance to everything,
even if you only trade stocks.
I'm going to move on to some things that
started to play out this week, as I hinted at in last week's commentary. I have
been discussing these with some students as they got closer to setting up, as
well as in the forum. I hope everyone did the work so you can compare what you
have to my frameworks here, and so you could watch them as they happened in
'real time'.
I'll start with gold.
Gold put together a nice-looking ABCD at an
outer division line, and after hanging around the area a bit it finally
exploded. It went up over twenty-five bucks at the high there already, and
closed strong. Strong dollar, strong gold at the same time? Since gold is
dollar denominated, one or the other is likely to change course soon. Of course
the dollar was weak Friday as gold rose, so there isn't really a big decoupling
of the inverse relationship in here, but they keep saying the dollar is going
to continue up. I am looking to other issues for that answer.
Let's look at
cotton, which I've been talking a lot about lately. I'll have to do it all in
one shot here.
The first arrow shows a spot I was talking
about way ahead of time with some students, and I made a comment in the forum
to work this one up. That area was on my chart back in November. Cotton rolled
right off the area like it was following a script. It dropped right to my next
major area to watch, and wow, did that produce a reaction. This sure is a bit
deeper than I like to see for the pattern I just laid out with rates as my
example, but I want to watch for this anyway, for additional reasons, too. See
this week's chart of the week, and think in terms of what I showed today when
you watch it. Understand, too, that it may not even get to that area, and that
is no reflection on anything. I'm just saying that if it gets there I
want to watch that area closely.
I'll finish with corn, another one
I have been saying to watch closely. This is the electronic version.
Corn formed a nice-looking ABCD, right in the
area of a key median line lower parallel. How clear is this for my methodology?
Look at some of the other grains (beans, soymeal, and wheat), too, and the
softs, as I implored you to do last week. Corn comes off the area, and then, as
usual, 'news' hits. Corn went 'limit up', and that last bar is actually just a
hash mark at the close, since no trading occurred for the length of that last
bar. I added a 'standard' set on there, to show where corn was at limit up.
Curious, huh, right there at that upper parallel? Now I see what happens from
here, and just enact the management plan as required.
If you didn't
do the work last week I hope you are kicking yourself for the opportunity you
missed watching this and doing some studying. Now you see why I say the trading
has just been great. Funny how all the news talk was about how the hedge funds
dumped commodities, and that commodities are now 'toast'. This seemed to peak
as I saw setups like this coming together. Amazing how that oftentimes seems to
be the case. Now we have another week coming up, and things are getting to
'first reaction' areas, where I can try to get some clues. I don't know about
you, but I sure think this methodology is fun...
The next commentary will be next
weekend's edition, posted by Sunday evening, January 21, 2007.
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