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Author: JsnStein Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 113  
Subject: Market summary 7-15-06 Date: 7/15/2006 6:42 PM
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Introduction

I spent some time creating this new format and I wrote a big segment on my cotton trade (see the Softs section). Now it is already late so I am going to skip the introduction this week.


Currencies

In general I am on the sidelines watching potential pennants forming in the British Pound, Euro and U.S. Dollar index. Given the fact that after raising rates in Japan (a momentous event, the end of the ZIRP – Zero Interest Rate Policy) the Yen didn't strengthen and actually weakened, provides further evidence of what I mentioned last week, the next major move for the U.S. Dollar could potentially be higher.

Australian Dollar: Neutral to slightly bearish.
British Pound: Neutral, watching a potential pennant forming.
Canadian Dollar: Bearish, currently short.
Euro: Neutral, watching a potential pennant forming.
Japanese Yen: Neutral to slightly bearish.
U.S. Dollar Index: Neutral, watching a potential pennant forming.


Energy

Breaking out to new highs. I am beginning to think it may have been a mistake not to go long this market when I watched the market break the declining trendline. But the volatility, especially the potential for more volatility still makes me extremely nervous.

Crude Oil: Neutral to bullish, too volatile.
Heating Oil: Neutral to bullish, too volatile.
Natural Gas: Neutral to bearish.
Unleaded Gasoline: Neutral to bullish, too volatile.


Grains

This is now officially a weather market. These markets, especially corn has really caught fire from drought fears. Ranges have expanded raising the risk and clouding the direction. I still think that too much ethanol demand is being priced into corn but without any evidence of this it will continue to add support and volatility to the market. I am going to sit back and watch.

Corn: Neutral, weather market.
Oats: Neutral to bullish, weather market.
Rough Rice: Neutral to bullish.
Soybean Meal: Neutral to bearish, weather market.
Soybean Oil: Neutral to bullish, weather market.
Soybeans: Neutral, trading in a channel, weather market.
Wheat (CBOT): Neutral to bullish, weather market.


Interest Rates

I mentioned a double bottom last week but didn't qualify that statement; there is a double bottom in the 30-year bonds. The markets are getting close to downtrend resistance, I am waiting to see if the downtrend holds.

2-year Notes: Neutral to bearish.
5-year Notes: Neutral to bearish.
10-year Notes: Neutral to bearish.
30-year Bonds: Neutral to bearish.


Meats

The advance in cattle has stalled and pork is looking weak, although the uptrend remains in affect. There is potentially a small pennant forming in Dec Lean Hogs.

Feeder Cattle: Neutral to slightly bullish.
Live Cattle: Neutral to slightly bullish.
Lean Hogs: Neutral.
Pork Bellies: Neutral.


Metals

Gold is benefiting from the geopolitical turmoil as well as all the other metals to some degree, although this looks to me to be tracing out a classic top confirmation. I am still looking at the short play in silver if momentum turns down.

Copper: Neutral to slightly bullish.
Gold: Neutral to slightly bullish.
Palladium: Neutral.
Platinum: Neutral.
Silver: Bearish.


Softs

I got yanked out of my cotton position. I want to take a closer look at this trade because I don't like how I played it. I took a short position with wide stops and the trade was working nicely. Then when the trade broke to the downside I added to my position, when I did this I lowered my cost basis so I had to lower my stops (or I would violate my risk control). At this point I also lowered my stops even further to bring them down to a break-even. This decision was based on the axiom, “never let a profit turn into a loss” and I had a nice profit in the position. Ironically that is exactly what I did. The market rocketed higher due to weather scares, high enough to hit my stops. Because the move was so fast I suffered some of the highest slippage I ever have, thus putting me at a small loss. (To be honest, my attempt to finesse my liquidation actually exacerbated the slippage.) Then the market subsequently did an about-face, going right back to a profit proving my initial, short view of the market correct. It always really hurts to see a nice profit evaporate.

In hindsight what was the lesson? Some might use this as a reason not to put hard stops in the market. I disagree. There are advantages and disadvantages to every method. This is one of the disadvantages; no doubt that the floor traders had their way with me here. But it still doesn't out-weight the advantages in my view. Hard stops have saved me from large losses more than enough times.

So what don't I like? I question my decision to add to the position. This decision forced me to lower my stops too low. If my stops would have stayed where they were before I lowered them I wouldn't even have been close to getting stopped out. I really liked the market action and I think I got too greedy. I admittedly had a longer term view of the bearish implications of cotton's recent break and thus should have played the trade more conservatively in order to keep my stops wider and give the market more room to move.

Trying to follow trades that hurt is always a bad idea. There is too much emotion involved. The trade is essentially a break-even; I didn't lose very much money. But losing any money on what was a winning trade hurts, it hurts the ego more than anything else. Thus I will stand aside in cotton for a while until another trade emerges although I am still bearish.

As far as the other softs, cocoa is still solidly in bull mode. There was a small reaction this week, but not enough to get me long.

I read an article saying that the OJ crop is going to be the worst in a decade and on that same day orange juice went down. It appears that orange juice may be putting in a top. I will wait until a top has been formed to consider a position.

Sugar #11 appears to have confirmed it's top. After jabbing through resistance it fell back below resistance on Friday.

Lumber and coffee are both still weak.

Cocoa: Bullish, weather market.
Coffee C: Neutral to bearish.
Cotton #2: Neutral to bearish, weather market.
Lumber: Neutral to bearish.
Orange Juice: Neutral, weather market.
Sugar #11: Bearish.


Indexes (Stock Markets)

The markets continue to break down as expected. The Dow and S&P broke through critical support this week. So why am I not short? I have been asking myself that all week! The indicators I watch show momentum stalled, (maybe it is time to throw them out!). The charts show the momentum being clearly down. When the Nasdaq composite hits the 2,000 level that should provide some buying and a bounce or at least some consolidation. A good place to get short or add to short positions. I think the Dow will be able to easily make it to the 10,000 level.

Dow Jones Industrial Index: Bearish.
Nasdaq 100: Bearish.
S&P 500: Bearish.


Notes

I revised how I am listing my market biases. I removed the “Potential Trades” section and instead I am listing my biases under each section for all the contracts I am watching. Everything marked either “Bullish” or “Bearish”, if they are not listed in the “Open Positions” section would be what I would have put in the “Potential Trades” section. I think this process provides a more comprehensive view as to what I am currently watching and doing. I also added the results of my trade in the “Liquidated” section.

Also note, I removed the Nikkei 225. When I decided to place an order to short this market I noticed that this market doesn't trade when the Japanese stock market actually opens. I had just assumed that a contract traded on Globex traded 24/7 as all the other contracts I trade on Globex do. This creates the potential for serious gaps in the price of the Nikkei 225 futures contract, which I don't like so I am not going to trade it.


Open Positions (average true range)
Short Sept. Canadian Dollar (.0086)


Liquidated (trade results)
Short Dec. Cotton #2 (small loss)


Jason
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