June 23, 2014

The Week Ahead – Focus may turn to Commodities

I left off on Thursday by commenting on how the markets remain extremely overbought and that reality can be ignored for some time, but the inevitable always comes or happens.  That inevitability is a normalization a period where excess is removed or injected depending on that dang technical condition of being ‘overbought ‘ or ‘oversold’.  It may be considered technical due to its numeric reading, but it truly is controlled ultimately by the emotional factor.

feargreedIn the past I’ve commented on the two primary motivational emotions in trading, those being greed, of not having enough and fear, of losing it all.   When markets reach extremes both are operating at full force and often produce what would be akin to “the deer in the headlights” syndrome.  When either of the two immobilizes trade the result is a return to the ‘mean’.  Volumes continue to be on the light side with much to do about the dreaded ‘summer doldrums’ hitting the markets early.

To believe this is the case could be a dangerous deception.  The broader indexes remain at all time highs and at extreme overbought readings.  Friday’s options and futures expiration did little to add any new evidence of what the coming week may bring.  The DJIA and SPX pushed new additional new highs keeping the upside intact for another week.  With the futures roll behind us the upside momentum may have crested for now.  Volatility as measured by the VIX is still being sold at 52-week lows and is nearly at levels I believe were seen in 2006 when the VIX dropped below 10.  The complacency factor is so stacked towards receiving a jolt of reality and that would favor of a ‘surprise’ type move that will scare the children so to speak.

It is not a matter of if but of when and the what may be beginning to slow boil as political and social tensions between Hong Kong and China get kicked up a notch or two.  This should start another capital rotation as money gets shifted in defense of defending.  While the equity markets may continue to churn higher next week there is a stronger likelihood that stronger 2-way trade will be absent.  However, there are several commodity and precious metals markets to pay attention to for trades.

Political uncertainty could bring a capital shift and that would likely bring the welcomed perk-up to 2-way trade.  The US dollar, treasuries, gold and silver should continue to build on volume and rallies.  Corn, wheat, soybeans are all oversold with the focus now on September through December the size of intraday moves should increase.  Remember in most commodities bad news is bullish for prices and good news is bearish for prices and weather factors cannot be ignored.

volatilityriskMonday proved to be a non-event with trading again repeating the same pattern and same light volume. The same story continues over in volatility indexes with the premium selling moving forward in full force.  Amazing but I am still getting advertising emails from so-called professional analysts that are recommending selling puts to bring untold riches to the masses.  This nifty trick will also run its course and create a panic when those positions produce huge losses.  It shouldn’t be surprising to see the high and mighty become the low and forgotten.  When the tide turns, and it will turn, there will be no where to run as the masses of asses try to “duck and cover” as the explosions begin.  With the markets now believing the US is a safe haven the broader indexes might hold up until knocked off their high perches by force.


Big ole Bushel of CornConsider adding additional markets to trade during non active periods such as what is currently taking place in the equities markets.  Currently I have found soybeans, wheat and corn to be active and producing large intraday ranges with solid 2-way trade taking place.  All three futures have the same tick size, which is currently $12.50. The margin requirement for wheat and corn is $1650 per contract and $3300 per contract in Soybeans.  Be sure to understand when and how the futures expire you don’t want to get stuck having to take delivery of 5000 bushels of corn.


Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

Trading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.