03/22/13: The end of Q1\'13 is here and so too does it bring the Japanese fiscal year end. Amid the seasonal ill-liquidity, the US dollar index is once again pushing back above the 83 level suggesting the fight between 83 and 84 isn\'t quite over yet. We will be watching that chart\'s resolution closely over the coming weeks per our recent WCTS blog posts and weekly updates. Seemingly to confirm this broader market bearishness, Bonds look to be bottoming, Copper looks to be topping and Healthcare (a sector that usually does well during bear markets) was the best performer through the entire quarter as suggested by our 1st 2wks study back in January. Lastly, with the recent announcement of US farmer\'s crop planting intentions released on Friday (where corn intentions are for the biggest US corn crop in more than 80 years) I thought we ought to take a quick look at the grain markets and what the charts might be suggesting there going forward. Additionally, this week I have included a short tutorial on Bearish Engulfing patterns (Japanese Candlestick price pattern) and putting those patterns into context given higher time frame chart analysis - enjoy...
So here we are caught right between the proverbial 'rock' and a 'hard place'. At the moment it literally feels like there is an equal tug of war of news going on and that seems to be confirmed by the price action. Now here is the 'rub' - as traders, we must always be asking ourselves, is the potential reward I may realize on this one particular trade justify the very real risk I am going to have to take. And as of Friday's price action, I don't see justifiable shorts on any of these one day moves. One by one, I can go through each of these grain markets and make just as compelling an argument for the bulls as I can for the bears and that unfortunately doesn't help our risk:reward ratio at all...
Of the six markets shown above, lets take a look at Corn since the news was so Corn centered. I find it particularly interesting that while big, Corn's move did not break the significant lows from only a month ago. 687.25 was the key weekly low (682 daily low from the May contract 03/07/13) and that is the number I shall be watching closely for over the coming sessions. If indeed, that bottom holds, then corn is actually still working a perfectly normal double bottom 'bullish' price pattern and may even be setting the stage for a massive bullish AB= CD price pattern heading into the summer seasonal peak. At the same time, we may very well be carving out a bearish AB=CD price pattern too. A break of 678.50 would confirm this and would imply a downside target just under $6.00 which coincidentally happens to be where some juicy gaps are that really need to be filled. So as you can see, not the best odds....really about a 50/50 bet... anyone got a coin???
As you all know, I am by nature a very conservative investor and according to the 'Two Rules of Investing', rule number 1 says we can't consider a trade unless we are absolutely confident of at least 66% accuracy. 50/50 is not 66%. Additionally, options prices are currently skewed for a 50/50 scenario. According to our options model (OnlyDoubles Trades) we can only consider an option purchase if it's current price is half of what we expect it's intrinsic value will be should the market move to our anticipated target. That only happens with we catch a market with too much of a bias in one direction or the other. Here, the market really doesn't have a bias (remember our tug-of war), so there really isn't an unfair advantage for us to participate.
Which brings us to our Educational segment on Bearish Engulfing price patterns and their appropriate use given the larger time frame chart analysis. Here then is a very interesting daily (above) and weekly (below) chart summary on the DBA agg. commodity ETF with particular emphasis on two 'Bearish Engulfing Patterns' as highlighted in Stockchart.com's predefined bearish engulfing pattern scan from Friday.
Current DBA weekly chart: http://scharts.co/Y1WnL7
The two 'blown-up' charts (#1 & #2) are the two bearish engulfing patterns I would like to concentrate on here today. Notice they both meet the text book definition of a bearish engulfing pattern and may look roughly the same - but alas, they are very different. When one looks at the weekly chart (below) we see that #1 occurred at the top of the price channel and there was a very well defined downside target (the very large weekly gap at $26.50). #2 has however occurred at what I would consider a very tough location.
First off, from a seasonal perspective we must keep in mind, spring is often a 'pivot' period for the broader market and especially so within the agricultural sector. Specifically for the grain markets, we are now shifting back to a supply driven market rather than the demand driven market typical during the North American winter. Prices shall be driven by fear of flood or drought and will ultimately culminate with the Fall harvest. In the face of poor international demand, it is not surprising to see that prices themselves have fallen for more than seven months and have left a lot of gaps to the upside that really ought to be filled in at some point down the road.
So with this backdrop (one very different then in late January) we are currently right up against a key low and Friday's action was unable to penetrate that low. The grain markets themselves were ugly but they did not break. Should they break, the very important low ($25.70 on this ETF) shall be broken too. BUT that has not happened yet and I do believe it is dangerous to assume that it will happen.
Given too, we will be entering the 1st 2 weeks of Q2'13 (and all the implications that go with that event), I will personally be reluctant to take any bets in earnest until that window is closed. I fear prices will test and maybe even break those significant lows early this coming week but then rally hard through the first two weeks as trapped shorts have no choice but to cover. Indeed, if it is one thing I have learned while working with the good people at TsT, there are/will be quite a few traders that would consider buying against the 25.70 low as a relatively low risk:reward long scenario.
So what is the point of all this then? Take away from this that not every bearish engulfing pattern is the same. Some occur at really good shorting locations, others occur at typical 'trap' locations. As always, nothing is guaranteed in the market and getting sucked blindly into each and every bearish engulfing pattern can be both mentally exhausting and financially debilitating. Take every chart pattern you see and put it into context given your higher time frame chart analysis. If they agree, then you may have something to work with. If not, beware!
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlight
The Canadian Rational Investor
the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlight
p.s. fwiw, I personally prefer the concept of the 'outside downside key reversal' (using OHLC bars) in that the market opens HIGHER than the previous two period's highs and closes LOWER than the previous two period's lows. Notice that while both are text book candlestick 'engulfing patterns' definitions, #1 above meets the 'key reversal' criteria while #2 does not....
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