Market Extremes – Part II

Posted September 12, 2014 By Phil Elrod

The grain markets are at extremes. The following chart is the December contract for Wheat futures, displayed as monthly data as far back as my data supply goes – about 2003.

Figure 1 December Wheat, Monthly Data

Traditionally when the market moves to extremes, such as this, it usually over does it by a considerable amount.

We will looking to take a long position at these levels, with a reasonable stop, and plan to hold the position for a much longer time span than our usual short term trade.

This is a fundamentals trade and the stop has to be wider and the time to hold longer. We do not do this very often, but when a commodity hits a low such as this, a significant bounce to the upside is not unusual.

We fully expect a retracement to the 521 level to be a distinct possibility. That would be a profit of almost $1,000.00 on a margin of $1,650.00. If successful the trade would earn about 66% profit – and we think that will be within a few days.

That justifies a soft stop of at least $250.00 below entry price at about 502 – or the 497 area.

We always monitor these trades closely.

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Market Extremes

Posted September 3, 2014 By Phil Elrod

Some of the best trading opportunities often occur at market extremes; when a market, for whatever reason, moves to a high or low not seen in a long time. We are seeing that condition in the grains at the present time.

Corn futures are trading at a four year low. Prices this low have not been seen since July of 2010. When the market bottoms some pretty good trades to the long side are likely. Now I am a technical trader, but I do pay attention to basic fundamentals of the markets I trade. Corn crops this year are projected to yield near record levels and in anticipation of that the market has pushed the price down dramatically in the past few months. It has been my observation over the years that such market moves often overshoot by a significant amount, and then retreat quickly as the reality of supply becomes known. Supply and demand still are the primary drivers of the price of grains. The corn market sees a large increase I supply. So prices are falling. Only the shadow knows what price will finally settle at, but it won’t be long as harvesting is beginning already.

I am watching corn very closely at this time and waiting for a sign that the market has finished its speculative take down and is ready for a bounce to the upside. Prices have declined by 33% in this recent downward move. Obviously there may be a great trade to be made when price finally bottoms and rebounds.

The situation in wheat is similar, but even more extreme. You have to go back almost ten years to find wheat futures trading at current levels.

Technical traders can increase their profit potential significantly by paying attention to just a few basic fundamentals of each market they intend to trade.

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The news these days is filled with articles about market manipulation – is it really happening or not? There appears to be no general consensus on the subject. But everyone has an opinion – and I, dear reader, am no exception. For many years I have been convinced that the precious metals markets were manipulated. The evidence, to me at least, is self evident. Allowing a single entity to hold as much as 40% of the net short positions in any market is proof positive of manipulation.

So as far as I am concerned, the statement that markets are manipulated, as applied to precious metals, is a fact. That the government looks the other way, passively approving, is likely only the tip of the iceberg. It is in the government’s interest that gold – and silver – be subjected to price suppression. That paper money has to be protected to the extent possible.

Not we are hearing of FOREX and stock market manipulation as well. It seems that there are no free markets anywhere.

So what difference does it make to a short term trader? Some, but not nearly as much as might be expected. Long term, it makes a great deal of difference that markets are manipulated. Who knows what the real price of gold and silver might be without the manipulators.

But the effect on short term trading isn’t all that dramatic. Let me explain. When we enter a short term trade we always have a stop loss in place – if not a hard stop (an actual order to sell if a certain price is hit), at least a soft stop (a certain price at which we enter our exit order).

In the precious metals markets the manipulation is generally to the down side. Knowing that and also knowing the time of day that such manipulations usually occur can go a long way to keeping the damage to a short term trader to a minimum.

And getting long after the manipulation ends can quickly compensate for a small loss as the manipulators took the market down.

The manipulation in FOREX and stocks is probably a bit different. I do not short term trade stocks, but I dabble in FOREX from time to time. My feelings about manipulation of FOREX is not as strong as that of the precious metals markets, but the signs of manipulation can be seen if one really watches the markets – particularly in the bid/ask values. I once placed great value in the values of bid and ask – particularly quantity. No I only look at the spread I price and watch the tick value to determine the strength of the market move at the time.

I detest the fact that the manipulators, particularly the precious metals, are allowed to do their activity (it is actually criminal) with immunity. It is a disgraceful display of total disregard for legality and fairness. But it will not end until the government decides to do something about it – OR the manipulators lose control of the market (a paper market is ultimately susceptible to the physical market).

There is a bit of government activity in examining market manipulation in FOREX and stocks. Who knows, honesty day one day return to the markets.

In the meantime, I continue to trade – hoping to be on the side of the manipulators, or with a tight stop if I am not. But it makes me sad to know that I am associating with criminals. It is sad commentary on what our society has evolved into.

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Why I call it “Music of the Market”

Posted July 22, 2014 By Phil Elrod

Why I call it “Music of the Market”

Look closely at the price bar action relative to the horizontal lines.

Those horizontal lines were put in several days before the day of this chart.

It is not very apparent but there is a line at the top of the chart.

Those horizontal lines (like the staff lines on a music sheet) are a road map to price action. I cannot imagine trading without them.

The secret to creating these lines can be found in my eBook SEE THE MUSIC OF THE MARKET.

Figure 1 Copper Futures 200 Ticks per bar 7-22-2014

Wouldn’t you like to have such a roadmap when you trade?

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