Soybeans July 16 2008

Before I get into today’s blog, a short detour to comment on Ana’s contribution:

The SEC has passed an emergency rule to limit short selling in certain types of institutions. Hmm, the thin edge of the wedge? Steve Briese recently placed a warning on his site that I posted on “S&P 06-30-2008“. Speculators are being blamed for the short-sighted policies of the Bernanke FED and the Bush administration. What’s frightening is this could be  the first step in this direction. The next targets could well be the evil-doers who have pushed up Crude Oil prices! It would not surprise me to see some move in that area. Be warned!

Off my soap box and onto the Soybeans. In this blog. the data  used for my charts is CSI’s Perpetual Contract. The ideas expressed here are contained in the Nature of Trends except for the references to Seasonal Patterns and COT data.

Figure 1 shows the 12-month swing (12-M; yearly trend).


Figure 1 12-M Soybeans CSI Perpetual

Notice that the current increase of 225% is second only to that of the 1974 increase. In addition,the stats from Gann Global data confirm the view derived from Figure 1: we are at an extreme price (i.e. mean + 3 stdev) where theoretically, there is less than a 1% chance of the 12-M swing line continuing up.

Figure 2 shows the 13-week swing (13-W; quarterly trend).



Figure 2 13-W Soybeans CSI Perpetual

Notice that we have a potential Upthrust Change in Trend pattern. We need to see a weekly close below 1486 that exhibits selling conviction to confirm the13-W Change in Trend.

The ancillary tools I use are also supportive of a short. Seasonal highs occur at this time and bottom end September. In addition the COT studies show  noticeably reduced trader interest than that shown at the March high, making a continuation of the up move unlikely. These indicators increase the probability of a short moving to at least Figure 2’s Primary Buy Zone (1086 to 1143, basis Perpetual Contract).

Figure 3 shows the bars that I entered the trade. I was happy to enter on the basis of a potential 3-d Head & Shoulders Pattern and more importantly because:

  1. A DOJI formed on Friday July 11 2008
  2. The market on July 14 formed an ‘Open-Gap’ down that was not filled on the 1st hour. (Bearish sign)
  3. The bear bar of July 14 prompted the entry on July 15 when the market accepted prices below the low of July 12.

Stops are above the July highs. My reward to risk ratio is 6:1. (Yes I did pre-empt the 13-W Change in Trend signal. I’ll do this where the short-term patterns support early entry, as in this case).


Figure 3 18-d Soybeans CSI Perpetual

Crude Oil – Wither now?

I wanted to review Crude Oil (this blog) and Soybeans (next one), the two hot commodities.

In the case of Crude Oil, let me say I am indebted to Gann Global ( . I have a reasonable data base but it is nothing compared to Gann Global’s. I subscribe to their services because of the raw information they provide.

If we look at a Crude Oil chart since inception, we go back to 1983. Let’s say I want to calculate a mean impulse move in the 12-Month swing (yearly trend), Figure 1 shows that a 5-year low took place in February 1999 and since that low we have had 2 measurable impulse swings – hardly an adequate sample.


FIGURE 1 12-M Crude Oil

The reason I want to calculate the stats? The move since January 2007 looks like a blow-off wave. I want to know if it is still high risk to contemplate an entry at these levels. You will recall I had posted a blog explaining why I had exited all longs at around 137.00

Gann Global came to my rescue – they provided the information I required. The approach they took was to measure the equivalent of the 60-month swing for all commodities and came up with a sample size of 67. Based on Pete Steidlmayer’s method of calculating the stats, mean +1 standard deviation came in at ‘290% increase to 729%’; ‘mean +2 came in at 728% to 1020%’; ‘mean +3’ came in at 1021% and higher. Since the start of the 60-M swing, February 1999, the increase has been 1092%, in the mean +3 category.

Theoretically, therefore, Crude Oil has less than 1% chance of continuing its upward climb. On this alone, I would say that to enter now would be a high risk entry. In addition, since it made a high on June 6 2008 at about 139 (basis CSI’s Perpetual Contract), Crude has been struggling to move higher. Finally, we can’t get away from Crude in the news; it’s everywhere: TV, magazines, papers etc.

There is another point I’d like to mention, because this is a blow-off wave, I expect the market to break sharply once the high is hit. Figure 2 shows the type of price action I mean.


FIGURE 2 Soybeans 12-M

This is not a recommendation to go short. There is no pattern to suggest a change in trend is imminent. Before going short, I would need to see an 18-d Lagging Change in Trend or at least a 5-d Forecasting Pattern (see Nature of Trends). However, given the maturity of the 60-month uptrend, now is not the time to rejoin the fray.

By the way, as an observation of my own trading, I tend to exit at the end of a secular trend 3 to 9 months too early. In the US stock market, I exited all positions in July 1999; the final top in the S&P did not occur till March 2000. I tend to misjudge the madness of crowds. As Lord Maynard Keynes once said: “The markets can remain irrational longer than you can remain solvent”.

So, don’t go shorting Crude Oil, at least not yet. If long, make sure your stops are in!

IndyMac Update & Scenario Creation

I was going to write on the bull markets of Crude Oil, Soybeans and Gold today; but I have decided to follow-up on the IndyMac failure and use it as an example in scenario creation. The link below leads to the video with the example. Below that are a number of observations on the IndyMac story.


  1. The IndyMac stock price had dropped from a high of US$45.46 on May 5 2006 to Friday’s open of US$0.21. It closed at US$0.28 and after the story broke, the market is said to have dropped to US$0.03. The fact that the stock price had dropped to below US$1.00 on Friday’s open illustrates that IndyMac’s troubles were well known.
  2. That being the case, you could argue we may not see a reaction. But I don’t see it that way. Indy is a large bank and its failure is another hot coal in the fire of the troubled US financials. Following on the heels of Freddy and Fannie, it will lead to an adverse effect on the US Stock Market.
  3. I looked at equivalent bank failures from 1966 to the present and 1900 to 1926. There were 8 in all. All had a similar effect of :
  • leading to at least a 4% to 5% rally and
  • On the day after the news hit the market, whether or not that day had a down close, we saw an up close in the Dow Jones. So, if the pattern is to repeat, then Tuesday should be an up close.
  • A sample of ‘8’ is not large enough to be robust but it does provide some data to create preliminary scenarios, scenarios that will be confirmed or rejected by the price on Monday after 9:30 am EST.

FIGURE 1 IndyMac Monthly Chart

IndyMac – Bank Failure Atlanta

I don’t normally post on weekends. But in this case the news warrants it.

At 6:00 PM Friday, the FDIC announced the closing of the US major bank, IndyMac and the transfer of its assets to a new bank. No one will lose money but the closure may affect two other lending institutions in Atlanta.

The news should impact Gold, the US$ and the Stock Market.


I expect the news to have an impact on the trading in pre-US session on Monday. According to charts sent to me by Sentiment Trader (SI), previous bank failures marked the start of a rally. In some case we first had a large day down that was followed by a bear market rally (or the bank failure marked the end of correction and the resumption of the uptrend); on other occasions, we had key reversal days.

Given the abovementioned SI report, selling at the open of the US session may not be the wisest thing to do. It will be Tuesday that will be important. In every case, we had a rally after the news day. So if we don’t get the rally on Tuesday, we’ll know something is different this time.


The news should send the dollar south.

I am interested to see if the EURUSD will result in a strong breakout. At the last attempt, the breakout above 160 was anemic and the US$ rallied. Let’s see if we have a confirmed breakout this time.

The other currency I like is the AUDUSD. The AUDUSD broke up on Friday July 11. I expect to see a continuation on Monday. A close below .9600 will negate a bullish scenario.


For reasons stated in the blog to come on Monday, I am of two minds about the current Gold rally. In any event, for Monday at least, we should see Gold up, at least in the early part of US trading.

I am attaching two reports of the failure. One is the statement by FDIC; the other is a news report commenting on the closure’s effects.



More information can be found at Ana Wang’s site:

S&P 07-10-2008

Yesterday I said that Tuesday, July 8, had generated a buy signal. Let’s take a look at that analysis.

Figure 1 is the 12-period swing on a monthly chart (yearly trend).



We see an Upthrust Change in Trend from up to down. The sell signal triggered in June when we saw a directional bar down. June’s bar negated the buying extremes of April and May. If July closes below 1291, then we should see prices move down to the bottom of value at 1030. If the Upthrust is to fail, it will most likely fail at the 50% area 1160 to 1161. By fail I mean the market will turn at that zone and resume the uptrend.

Figure 2 shows the 13-period swing on a weekly chart (quarterly trend).



Figure 2 shows that:

  • the 13-W as yet had not given a Whole Point Count (WPC). However since the 12 line has turned down, I expect the 13-w to provide the WPC in the next 2 weeks.
  • You’ll note the price at 1458.87 – this is the price at which the 13-w will turn up this week. This price will continue to fall in the coming weeks. Should the 13-w line turn up, we can expect an 18-d trend change to be signaled.
  • The 13-W is signaling a possible Negative Development Buy signal. It is not a Spring but the signal was not preceded by a downtrend. In this context, the buy signal would suggest a 13-W sideways market between 1404 and 1256.

Let’s turn to the 18-period swing on a Daily chart (Monthly Trend)


FIGURE 3 18-d S&P (CASH)

In Figure 3, the 18-d Barros Swings have been obscured by the 60-day Hart Swings (i.e. the quarterly trend is so strong it is dampening separate 18-day swings). The blue rectangles mark areas where we have seen strong responsive buying. This is a bullish sign because the 1255 to 1240 area are new lows in a 5-month period but the market has been unable to definitely break down.

A close above 1280 with buying conviction would provide a Negative Development Buy signal. Since this would mark a 13-W line turn as an 18-d trader, I’d take the trade. However, because the 12-M has just confirmed a sell signal and at best the buy would mark a 13-W , we’d be looking at stops below 1220 (i.e. below the maximum extension) but this is too wide a stop. Anther stop I’d try in this case is below 10% of the range 1280 to 1240 (current low) below 1240. This would give a stop around 1234: 46 points still too big.

Hence if I were to take the trade, I’d have to enter intra-day. Figure 4 shows the Market Profile on July 8.



The blue rectangle shows the area I would have sought to enter my longs, around 1262 to 1265. This would represent around a 30 point risk (stop 1234), something just acceptable.

The rationale for the buy was this: The market auctioned down to the Primary Buy Zone of July 7 and found support. If the market was going to form a low, we could expect a 30 point range. An order on stop above July 8 ‘G’ period high could secure a buy late in the day extension.

The market accommodated the scenario. But note that the buy was not confirmed. On July 8 we had a strong day up on solid volume but had not closed above 1280. To confirm the trade, we needed to see continuation on July 9. We see in figure 4 that on July 9, the market opened and rotated in the early part of the day. This development would have caused me to raise my stops to just under the 50% area of the Profile of July 8 (area marked in red). When the market broke during the ‘K’ period, I’d have lost 1 to 4 points.

Note I have said ‘would have’ throughout the blog because my health prevented me from taking the trade.

What now?

Figure 5 shows the 80-minute S&P with 18-period swings (red lines). It also shows my preferred Ray Wave Count with a running correction at minor structure 4. (The filled numbers represent the minor structure). This is not an ideal running correction because of the strong corrective up waves (marked in red rectangles). But the price action of July 9 is characteristic of the end of the correction.

If the running correction scenario is correct, we can expect another down today. I’d expect to see either a directional bar down or a bear-bar (see Nature of Trends).


FIGURE 5 S&P 80-Minute

S&P 06-30-2008

Hi All! It’s great to be back if only for one issue this week. Next week, I’ll be back back to writing Monday to Friday.

Before I look at the ES, I want to thank all who dropped me a ‘get well note’. As soon as I can sit for more than 20 minutes at a time, I’ll reply to each of you individually.

Secondly, I want to thank Ana Wang for doing a sterling job while I was away. Just four more days,  Ana, and you’ll be off the hook. Thanks too to all who have assisted Ana with contributions.

Thirdly, I subscribe to Steve Briese’s ‘Commitment of Traders’ newsletter. There is a timely warning at

http://CommitmentsOfTraders.ORG/?p=37. I recommend you have a quick read of this post.


Let’s turn to the ES.


Friday’s price action is a warning to the Bears not to become complacent. Let’s see why.


The current trend is a sideways market. Figure 1 shows (all figures basis cash):

  1. The boundaries of congestion: 1440 to 1256

  2. The Value Area: 1399 to 1318

  3. The Primary Buy Zone: 1258 to 1281

  4. The Primary Sell Zone: 1440 to 1418

  5. Friday’s Bar Range of 17.45 was at the lower end of normal BUT its volume was at the higher end of normal. This is a Negative Development Buy Signal (see Nature of Trends).

Given Friday’s small range/large volume day, the market is warning of a possible rally. This is one side of the picture. On the flip side, notice that the average daily volume on the way down has been around 457,000. I’d have been more comfortable buying if this volume would have been less than that. In this congestion, volume of this magnitude has resulted in breach of the previous lows (on 01/23/08 and 03/17/08).

So how would I handle this situation? Recall that I trade the 18-d and it has signaled the probability of a down trend:

  • An Upthrust Change in Trend affirmed by the Whole Point Count (WPC) and other filters.

  • What is missing to confirm the down trend is a series of lower lows and lower highs.

So I would not initiate long positions until the downtrend signals are invalidated. But, if short, I would take profits on some of the positions. I’d also be on the lookout for how the market behaves on a breach of 1256. If the market shows signs of facilitating trade to the downside, I’d look for a place to initiate some new shorts.




Collapse in market volatility



Market Volatility and its collapse

Cross ref:


Fig: SP500 Daily that is close to a collapse in volatility of price bars, (in rectangle) leading to strong down move

What is market volatility?

Volatility is a measure of dispersion around the mean or average return of a security. One way to measure volatility is by using the standard deviation which tells you how tightly the price of a stock is grouped around the mean or moving average (MA). When the prices are bunched together, the standard deviation is small. When the price is spread apart, you have a relatively large standard deviation.

Another way to measure volatility is to take the average range for each period, from the low price value to the high price value. This range is then expressed as a percentage of the beginning of the period. Larger movements in price creating a higher price range result in higher volatility. Lower price ranges result in lower volatility.

The stock market is a volatile place to invest money. The daily, quarterly and annual moves can be dramatic, but it is this VOLATILITY that also generates market returns.

Market Performance and Volatility
There is a strong relationship between volatility and market performance. Volatility tends to decline as the stock market rises and increase as the stock market falls. When volatility increases, risk increases and returns decrease. Risk is represented by the dispersion of returns around the mean. The greater the dispersion of returns around the mean, the larger the drop in the compound return.

Market behaviour is predictable to a degree, but no one can predict what a specific market will do at a precise time. The market business is not one of predictions but one of probabilities. As one TV ad rightly declared: If you want a fortune-teller, the place to go is to the circus.

When we have enough experience, we will know that price history repeats itself. From price history, one can extrapolate predictable patterns of price behaviour because they are fractals as I mentioned in an earlier post about the Golden Mean and fractals occurring in markets as well.

Having said this, there is a pattern which I recall that my mentor Ray Barros has once pointed out to me to watch out for. It is the pattern known as a ‘collapse in volatility’. This collapse in market price volatility occurs when trading ranges narrow substantially, so that the price chart bars of whatever time frames suddenly get smaller. These price bars should be at least three in a row and do not need to get progressively smaller in each bar.

However, we should not confuse a collapse in volatility with a trading range or congestion or sideways pattern. A trading range has some support or resistance levels, which are also longer in duration than a collapse in volatility. The bars are also not so narrow.

What happens next is a probable trigger of a significantly bigger price move – which could be up or down. Sometimes, the use of additional technical indicators may help us see which direction the market is likely to go.

Suffice for me to say, when you observe such a collapse in volatility in price movements in a chart of any time frame, be forewarned of a bigger price move to come, which could either go north or south.


Ag Moderator


Cross ref:

June 24, 2008 – 12:00 am





Headlines such as this bombard us in the ads almost daily:

Market Makers: The Wisdom Of Steinberg Aided by two industry legends, here’s how Jonathan Steinberg transformed an ailing publishing business into an ETF juggernaut.

Beyond the hype, an ETF is not for every one.

We need to consider what is an ETF.

ETFs are basically index mutual funds that trade like stocks. When you buy an ETF, you own a single security that represents a basket of stocks, tracks an index and fluctuates with the value of the underlying stocks.

With an ETF, you place an order to buy or sell shares just as with any other stock—and you pay a commission on that trade. This means you can buy an ETF at its current price anytime during the trading day. In contrast, you can only buy an index fund at the closing price.

ETFs also tend to be more tax-efficient than index funds. One example is the oldest ETF, the S&P 500 Depositary Receipt (SPY). Often abbreviated as SPDR and pronounced “spider,” it had average capital gains distributions of less than 0.02% of invested assets during the past 12 years versus. an average 0.35% for the largest three S&P 500 index funds.

Another advantage of ETFs is that they are not required to keep return-dampening cash on hand for redemptions, unlike mutual funds.

When do you choose ETFs?

  • Investing a large amount of cash in an index
  • Getting exposure to a sector or asset class at a low cost
  • Putting excess cash to work.

When do you choose Mutual Funds?

  • Investing small amounts of money at a time
  • Seeking an index-beating return.
  • Investing in certain categories – Mutual Funds number 10,000 against 600 ETFs.

Now that you know that ETFs are basically index mutual funds that trade like stocks, have low expenses and are easy to trade, are a cheap, easy, tax-efficient way to get good diversification, it is not all what it appears to be.


  • Myth No. 1: All ETFs have low expenses.
  • ETFs will also have a transaction fee that you pay when you buy or sell—just like when you trade a stock. Mutual funds may have a transaction fee as well as a sales charge.
  • Myth No. 2: All ETFs are easy and cheap to trade
  • For ETFs that are actively traded all day long, the bid-ask spread tends to be quite small. But less-liquid ETFs tend to have much larger spreads.
  • Myth No. 3: All ETFs are index funds.
  • Some indexes are effectively and actively managed; the company that puts the index together tries to include only stocks that it believes will outperform the market. This leaves you open to the possibility that the people or companies assembling the index will be wrong about which stocks will outperform. That is called active management risk, and avoiding that risk is one of the features of indexing that some ETFs fail to provide.
  • Myth No. 4: All ETFs are tax-efficient.
    Much has been made of the tax-efficient nature of ETFs, and it’s true that they are often more tax-efficient than similar mutual funds. The main reason for this is that ETFs usually will not be forced to distribute capital gains to shareholders; just because a fund is an ETF does not mean that you will avoid all taxes as long as you hold it. Many ETFs still pay out dividends and interest to shareholders, and these payouts are taxable.
  • Myth No. 5: All ETFs give you diversification.
    Finally, you may like the easy diversification provided by an ETF—by making one trade, you suddenly have a well-diversified domestic equity portfolio. Very narrow ETFs may provide you with very little diversification.

So these are the myths debunked.
Not all ETFs are alike. While many ETFs are good tools for providing inexpensive, highly liquid, tax-efficient diversification without taking on active management risk, some ETFs fail to live up to this billing.

CAVEAT EMPTOR: YOU must consider carefully what it is you want from an ETF before you buy and that the ETF delivers.