The Futures Report March 30, 2007

 

The Futures Report

Trading the World’s Markets            

March 30, 2007

                                            
Matthew Caruso, CMT                                  
If you have any questions send them to:                
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This report covers the recent sell signals is Gold and Soybean Meal. The new trade for this week is a long setup for Wheat. As well, future long setups are discussed for Sugar and Coffee.

Current Trades

Markets with outstanding trades

Grains

Soybean Meal (Short): Last week’s report based on March 23, 2007 closings detailed the possibility of a fall in Soybean Meal (SM). Figure 1 displays last week’s trading and Friday’s large fall. An initial $570 per contract gain developed into a gain almost twice as large, already representing a 2:1 reward to risk ratio. Exiting a trade becomes a matter of money management as well as technical analysis and both should be taken into consideration. Therefore partial profits should be taken when gains are achieved and protective stops tightened regardless of the technical picture because the unexpected should always be expected.  Although SM is acting as anticipated it should be noted that investor sentiment is largely bearish with only 14 percent of market participants bullish on SM as can be seen in the lower panel Figure 1. Such a bearish sentiment by investors is a contrarian indicator and therefore a bottom in SM may soon be approaching.

Figure 1 Soybean Meal

Metals

Gold (Short): Last week’s report based on March 23, 2007 closings detailed the possibility of a fall in Gold (GC). Gold prices fell below the low of March 23rd this past Thursday as anticipated. However, after Thursday’s fall Gold prices closed higher Friday. It appears that despite Gold’s fluctuations between $677 and $660 in the past 2 weeks, Gold has been consistently close in a much smaller range between $671 and $666. as can be seen in figure 2. This kind of price action can be interpreted as churning and distribution and therefore until the high of $676 is significantly penetrated, gold is still expected to fall as detailed in last weeks report.

 

Figure 2 Gold

New Trades

Markets that are ready for entry

Grains

Wheat (Long): The grain markets have experienced a large bull market in recent months and Wheat was no exception. However, despite a large appreciation last fall, Wheat has persistently underperformed the other grain  markets and has topped several months ago as can be seen in Figure 3. It seems that Wheat may now be oversold and is ready for a rise. Figure 3 has a bearish triangle chart patter outlined which traditionally precedes much lower prices. However, there is reason to believe that this break of the triangle may be a bear trap. A bear trap is the process of creating a sell signal by larger traders preceding a run up with the expectation of trapping short sellers who will later become buyers when closing their losing short positions. In order for Wheat to be a buy it must reverse Friday’s fall and climb above Friday’s high, thus trapping many shorts.

    With a bearish triangle formed Wheat may continue to fall but short entries at this point would have a rather large risk and therefore are not recommended. There are several reasons however for believing that the triangle may fail and lead to a rapid appreciation. Figure 4 is a monthly chart of Wheat extending back to 1992. This chart shows how Wheat is now at a major support level as shown with the green horizontal line. Not only is Wheat at a support, but investors are very bearish; only 12 percent of investors are bullish as can be seen in the lower panel of Figure 4. As can be seen in this chart, prices tend to bottom when market participants are overly pessimistic.

Therefore, Long entries in Wheat can be made above Friday’s high.

Figure 3 Wheat Daily

 
Figure 4 Wheat Monthly

Market Setups

Markets needing a correction or consolidation before entering

Softs

Sugar (Long): Last week’s report detailed the reasons why Sugar is now approaching a major low. Sugar continued to fall this week, but the longer term picture is still the same. Some additional evidence of an upcoming bottom is the large positive divergence in the MACD as can be seen in Figure 5. It is important to wait for signs of a trend reversal before acting upon leading indicators displaying the possibility of an upcoming bottom because trend is the dominant factor is anticipating future prices.

 

Figure 5 Sugar

Coffee (Long): Figure 6 is a weekly chart of Coffee. Coffee is now approaching a major up trendline which extends back to 2001 and which has successfully provided support 5 times for Coffee prices. Also, the bottom panel of Figure 6 displays a 7 week RSI which is approaching the oversold level of 30. The combination of a strong up trendline and oversold momentum creates the possibility for a rather large up move in Coffee prices. However, before a long trade is possible, Coffee must successfully test the trendline and show a change of trend on the daily timeframe.

Figure 6 Coffee