10/22/10: In a week that saw the US dollar bounce, many if not most commodities took a breather from the torrid pace that has been set over the past few weeks. Considering the significant fundamental event on the horizon, it should be of no surprise to see a proverbial 'calm before the storm'. Interestingly, only the Nikkie still remains bearishly pointing. My hunch, once Japan's stock market starts pointing higher (and thus making every stock index followed bullish) we will know that the equity rally has almost come to an end. That hasn't happened yet so enjoy the mini-bull in your neck of the woods while it lasts. Of particular note this week, Live Cattle and Wheat are starting to show signs of reversing, is this the beginning of the end for the grain rally?
Wheat & Live Cattle
The late summer saw a dramatic rise in the price of grains. Wheat for example, moved from a low of $4.5/bushel to almost $8/bushel in less than three months. But that bullishness seems to have evaporated for the time being. Indeed, Wheat prices began to break down three weeks ago when prices traded back below 647. CTS now has a short trading pattern working (where one ought to be short from that 646 area with corresponding stops just above the recent highs at or near 7.535). The 50% level for wheat currently sits near 607 for a profit potential of 40 points ($2000/contract). While CRI doesn't have a position here, CRI still expects this market to continue to correct into the harvest. Once the 50% level has been reached the next technical objective shall be to gap at $4.9 area; but we will cross that bridge when we come to it.
Live Cattle
Quit conversely, Cattle prices spent the summer going sideways and have only now started to break out in earnest. The move this past week through the significant resistance at 1.00 has cleared the way for Live Cattle prices to move into the $1.10 area if not higher. This is a classic bull flag formation and one of the easiest patterns to trade. One should be long from the breakout (at or near 100.2) with corresponding stops below recent support (in this case I would be thinking 94.50 area). The target is straight forward in that one takes the flag pole distance (in this case 100.2 minus 78.7) and adds that number to the bottom of the consolidation (in this case 87.9). One could even have an open order to sell (once you have been confirmed on your buy!) sitting at $109.3. These price patterns can move very quickly so if you missed it...don't chase it!
Summary
The fact that Wheat and Cattle have price inverse price patterns working suggests to me there is money moving in the market. Considering the time of year (specifically the seasonal tendency for farmers to bring their harvested crops to market) I think there is validity to these breakouts.
At all times one must ask, 'is the trade worth doing?' And unfortunately in both cases, there just isn't enough of a profit margin to justify taking the risk. In wheat's case there is 40 points of profit for over 100 points of risk. In Live Cattle's case the original trade [long from 100.2, with stops just below 94.5] would have had 9 points of profit for 5 points of risk but now that the market is at 102, this trade now has 7 points of profit for 7 points of risk.
Here then is a case of understanding where the market is going but not doing the trade. Since we have a limited amount of capital to work with (and we really don't want to loose too much if we are wrong) we have to be constantly deciding if a trade is worth the risk. One simple formula CRI uses to judge if a trade is worth taking the risk on:
Option eligible:
If a six month option's strike price - your target price is twice the current offer for that option
Non-option eligible stock:
If your target price is twice the current market price AND your risk is less than 50%.
penny stock note: CRI tries to buy stocks that have been recently rolled back (please refer to CRI's Venture Cap Inv Model for more on this) and take a 100% risk on the trade. This approach could only be contemplated understanding that any single trade NEVER represents more than 5% of total assets of a portfolio.
We traders spend a lot of our time just watching and here I think is a great example of just sitting patiently on the sidelines and enjoying the scenery...
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com
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