Commodities Fall Sharply this Week

Mar 22, 2008: 9:18 AM CST

The major Commodities Markets were not spared the rampant volatility of last week’s price action. Let’s take a look at some of these key markets:

Let’s look at the broad-based $CRB, a widely followed Commodity Index (weekly chart):

I have drawn three blue lines which are indicative of the “Three Push” pattern which can precede a trend reversal. The pattern is indicative of strong buying power and consists of three waves of buying pressure that occurs in strengthening momentum. Notice the ferociousness of the recent price retracement in the index, which took the value down to the rising 20 week moving average for a test of that level.

We can’t call a trend reversal yet without a lower high and a lower low. Right now, we simply have a strong momentum higher high following a momentous rally. It would not be surprising to see consolidation at least at these levels.

Crude Oil prices fell $10 from its intraday high of $110 last Monday and recently tested the rising 50 period daily moving average just beneath $100 per barrel.

Notice the power of the recent ‘power buy’ swing which took prices out of the consolidation rectangle onto new highs. It’s not at all surprising that the market would need to ‘rest’ after that major development (and un-checked swing from $85 to $110).

Like a coiled spring that is stretched too far, the market will often snap back quickly after a lengthy power swing that doesn’t have a clean retracement.

Gold is not much different than Oil recently. The precious metal fell 10% from its intraday high Monday of over $1,020 per ounce. Price is currently testing the rising 50 period moving average.

Notice the momentum divergence that preceded the snap-back retracement. You shouldn’t be surprised that a move of this magnitude could occur following an obvious momentum divergence, especially with the two doji candlesticks that preceded the two-day drop (doji patterns are often signs of potential market reversals).

Also, commodity prices (especially gold and oil) were being featured prominently on the news and in the conversations of everyday people, and when news becomes widespread, the opportunity dims and contrarian thinking causes savvy traders to employ potential reversal strategies.

These commodities remain in powerful up-trends, and retracements against this trend should not surprise us in the least.

Let’s continue to keep a close eye on these markets for signs of trend resumption (which would be a negative for the broad stock market) or reversal (which would help the market because it would crush the argument that stagflation is possible).

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InTrade Raises US Recession Chance to 78%

Mar 21, 2008: 4:26 PM CST

Traders expressing themselves through the InTrade Prediction Market today raised the chance of a US Recession in 2008 up 8% to 78.5%.

The way the market works is that traders invest real money and buy contracts that allow them to express their opinion. Here is a quick explanation:

If you’re interested in seeing the lifetime contract percentages of this particular item, here is a chart below:

This means that, in aggregate, people are expressing their opinions by using real money in anticipation to profit from their views, and whether their views match reality or not.

As with the stock market, an overabundance of buyers will push the contract higher and vice versa. If you feel we’re headed into a recession, you could make some quick money by betting on this idea (or lose money if we don’t!).

On an unrelated note, InTrade participants also currently give Barack Obama an 80% chance of winning the Democratic Nomination against Hillary Clinton’s 20% chance.

If you think Hillary will win, you could stand to win $80 per 10 contracts you buy for a risk of $20.

I like to use the service to watch as current events are reflected virtually instantly into the ‘prediction’ price, which filters much quicker than standard polls or surveys.

Either way, it’s an interesting service and you may want to keep an eye on these markets (percentages) if you’re unfamiliar with them.

 

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Cool MA Consolidation in Apple (AAPL)

Mar 20, 2008: 12:53 PM CST

I wanted to point out a quick little pattern in Apple (AAPL) on the 5-minute chart today that I found very curious.

I zoomed in on the area of interest. Notice how the 5-minute bars respond virtually perfectly to the falling 50 period moving average and the rising 200 period moving average.

What’s interesting to me is that the moving averages are almost trend-lines that drew themselves! You may be thinking, “I didn’t know my software drew trendlines for me automatically!”

In reality, it was just an interesting ‘fluke’ that I wanted to spotlight. The pattern formed a symmetrical triangle that served as a continuation pattern, complete with a ‘throw-back’ test trade.

Recall that today is the last day to unwind options contracts (as well as “quadruple witching”), and so it’s not surprising to see such massive consolidations and seemingly random movements.

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Trader’s Whiteboard: Theory into Practice

Mar 20, 2008: 10:59 AM CST

INO.com released a recent video in their Trader’s Whiteboard Education Series that puts simple trading ‘theory’ into practice.

The video is entitled “Keep it Simple and Straight” and discusses specific examples of how to apply trendlines and turn trendline analysis into actual trades with high reward to low risk (stops are placed just beneath the trendline).

President Adam Hewison analyzes Google (GOOG) and how trendline analysis could have alerted you to some potential dangers prior to the recent sharp decline.

Recall that you must have three valid touches or “tests” to confirm a trendline, but at that point, Adam teaches how to apply simple trading tactics to the price structure.

To delve a little deeper, Adam also discusses how to use Fibonacci retracements with your trendline analysis.

If you’re unfamiliar with the Market Club Service , check it out and see how it may be a benefit to you as a developing trader.

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Gold Loses Some of its Luster

Mar 20, 2008: 10:55 AM CST

Gold plunged almost 6% yesterday, falling $59 as hedge funds unwound positions and speculators took profits in the precious metal. It’s an interesting development that warrants further attention.

I’ve drawn in two symmetrical consolidation triangles on the graph that highlight these patterns and the continuation move that occurred as the contract broke free from these zones to make new highs.

Much has been written about how gold is a hedge against inflation, and how both gold and crude oil have been making new highs, but that doesn’t mean the ride will be easy or smooth.

There were hints that alerted savvy traders to this potential development ahead of the major one-day plunge.

Notice the key negative momentum divergence that set-up as price made new highs but were not confirmed by new momentum highs. That was an initial warning sign that the bulls may be losing steam.

Second, notice the two long legged dojis that preceded the one day plunge. The doji on March 17th came close to forming a ’shooting star’ pattern or a gravestone doji, both relatively bearish. Dojis tend to mark turning points in the market after a large rally or decline, and are said to be signs of “indecision.”

The candlestick just before the decline was also a doji, but more akin to a ‘dragonfly doji’ which also signaled ‘pause’ or indecision. Finally, the large volatility move signaled that the bears won the ‘battle’ and swiped prices lower, shocking latecomers who saw an easy profit because everyone said gold was making new highs.

Nevertheless, the structure still shows an uptrend, and we may have support coming in from the rising 50 period moving average.

 

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