I began talking about buying the softs 10 days ago. In real time, bottoms never look like bottoms. In real time..... at that moment, it just looks like it is going lower. Back in August, did cocoa look like a bottom? No, it looked a lot like cocoa looks today. Some of the traders I am working with have bought into the softs but most have not. I am still getting a lot of interest in pressing stock, metals and energy trades but virtually none for the softs. Cocoa even has a double bottom yet nobody is asking me about buying cocoa.
Sentiment readings on cocoa have reached extreme oversold levels.
Seasonally speaking, March and April are good times to own Cocoa.
Moore's recommends buying cotton in March and in April.
Cotton is another soft that shows tremendous potential. The cotton industry already has large exports on the books. It just had a swing low Monday. Like cocoa, cotton looks to me to be bottoming now. The chart is not as compelling as the cocoa chart but there are other qualities I like
Cotton sentiment is at extreme levels here at 19. This is even more extreme than cocoa. Extreme bearish sentiment levels fuel strong rallies. With so few sellers left, there is not much left in the tank for the bears.
Seasonally speaking, cotton usually has good returns in March and April.
Sugar is another soft commodity that looks to have made a double bottom. This looks sweet!
Of the three, I would prefer to see the optix on sugar a bit lower.
The bottom line here is that we don't need to chase assets that have already popped off their lows. The edge we have in this method of trading is that we can be bullish when everybody else is bearish. This is not as sexy to trade as stocks, gold or oil but this group has limited downside and a lot of upside potential. When it comes to trading, patience is what will pay in the long run.
The stock market has reached the Intermediate Cycle Trend Line that I mentioned in my last post. There are only two scenarios I can see here:
1) Price gets rejected off the trend line and we re-visit the low or
2) Price blows through the IC line and the stock market rips higher.
This is why I did not want to just take us out of position once we approached the trend line. I wanted us to be in a position to have a strong hand should price continues higher.
The NASDAQ index has already crossed back above the IC trend line this morning and closed strongly above.
Looking at the weekly chart, if price remains strong tomorrow, it will give what is called a bullish engulfing pattern. You can read more about that at Investopedia. Clearly the bulls have seized control of this market. It just shows that if you have enough trillions in money, you can make most any problem disappear. It is possible that the 200 week moving average will act as resistance here. If that happens, it will help the first scenario.
So it is beginning to look like this is going to be a V shaped recovery which is really what our country and the stock market really need. If scenario 1 is going to happen, it needs to happen tomorrow. If that does happen we will be stopped out quickly and we can re-load near the bottom. If price breaks through the IC Trend Line, we will now need to chase to begin a position or to add. Chasing from here is not really a bad scenario. Friday will only be day 4 of this new daily, weekly, yearly and 4 year cycle.
I am pretty certain at this point that the stock market has put in a daily, intermediate, yearly and 4 year cycle low this week. For trading purposes, we need to see stocks break above the intermediate cycle trend line before we have our final confirmation that a new intermediate cycle has begun. I don't think we will get this break above the IC trend line the first time. I think there is actually a 50% chance we could see stocks re-visit the lows.
I will be tightening up everybody's stops on all index positions as the S&P approaches the IC trend line near 2600. This will just be a stop in case I am wrong and we blow through to new highs, but in case price cannot penetrate the IC trend line the first time I want us to at least keep some eating out money. Of course we can't eat out, but any way.
Once price approaches the lows again we should be prepared again to re-enter our longs and maybe re-position a few things and get ready for price to finally confirm that we are in a new daily and intermediate cycle.
I know I thought we would get an opportunity to buy stocks last week. Fortunately we did not take a bite. I do think there are positive signs happening that could indicate we are going to bottom this week.
The NQ Index that we trade is actually the futures contract for the NDK which is the NASDAQ 100 index. This is slightly different than the NASDAQ index. It is just the 100 largest companies that comprise the NASDAQ. Price has reached the 200 week moving average tonight.
The S&P index gapped lower tonight. I realize this is counter to common thinking but this is a good sign that a bottom is near. It is the ultimate exhaustion in a price move. It creates what traders call Island Reversals and Abandoned Baby price formations. You can look up what that means at Investopedia.
Before taking a long position in stocks we need to see the 10 day moving average flatten out and then a close above the 10 dma.
I am not yet ready to make any metals trades or energy at the present moment, but I like most anything ag related.
I think the extreme bearish stage of this market collapse is nearly through and I wanted to share some ideas of things I am watching.
I am about ready to pull the trigger on a stock index trade. While here in the US we are yet to experience peak COVID-19 cases yet, new cases are now in decline in some of the worlds hottest spots such as China and Italy. The peak in the bond market is signaling that stocks have bottomed. I think we need to be thinking of how to enter the market with a long position of some sort, even if it is only with a micro-mini contract.
I am going to take a position in one of these indexes, but I am not expecting this move to be pretty. I think we should still expect a lot of volatility. We have just been through several weeks of extreme volatility and if that about did you in then don't feel you should take this trade. I am going to list some ideas that I think should give an easier ride a bit later.
Here are some ideas on where I would like to see the stock indexes go tonight. I may put in an offer to buy one of these at these levels. Remember there are the micro emini contracts which are 20% the size of the normal emini.
I am not ready to recommend buying any precious metals now, but I may try a Palladium contract here. I am placing an order to buy a Palladium at 1400 tonight with a stop at 1350 should it get hit risking 50 points. Each PA point is worth $100.
The move in PA since early December was just ridiculous.....almost parabolic. PA trends well but its cycles end with a thud. It tends to give a steep drop lasting only 2-3 days before resuming higher. It usually becomes oversold on the 3 and 5 day RSI.
Ohhh, did I mention the margin required for a PA contract is now $28,600? It was only around $12,000 6 months ago.
I did buy soybeans tonight. Seasonally speaking, this is not the time of year you want to be buying soybeans, but the cycles and seasonals are kind of out the window at theis point. This trade is more based on what appears to be a completion of a price pattern going back to last fall. The green and the blue box are identical in size. I think we could see beans rally 50 cents over the next few weeks. Stop at 8.20.
I like long positions in Hogs and Cattle. The target area is in the green.
I also like long positions in sugar, cotton and cocoa here. Cocoa has already given a hammer type of candle today.
Look at the updated futures specs document I sent out earlier to learn more about how these trade and what the margins are.
There is a reason why I said "this is not a recommendation" Friday on WhatsApp when I brought up the idea of buying crude oil. We have no confirmation yet in the form of a swing low. We need to be very careful here and avoid thinking "It can't get any lower". Let me say from experience.....it can always get lower.
At the posting Friday, we were getting very close to the $42.20 multi-year support level. This would ordinarily be a great time to go long, but near the close, oil dropped a little below that level essentially breaking support and closing at $41.57. This has me concerned we could see further downside.
The break is even clearer on the weekly chart. The next level of support from here is rather minor at 39.19. a drop below there could take us lower than you could envision.
The drop below $42.20 would be called an undercut low. The price dropped below previous lows which I am sure was noticed by a lot of traders. This could spook traders to sell their positions and trigger stops putting further pressure on prices. This could be a warning and we need to be very careful. This could be the beginning of a blood bath.
Cycle wise, the daily oil cycle lasts 30-50 days. Friday marked day 23. A 5-7 day blood bath would get oil to the early part of the timing band for a daily cycle low. A blood bath phase is a sentiment cleansing event and marks the end of many intermediate cycles. Once this is over, it will probably be very difficult for you to go long oil but that is the moment when you really have to buy. You normally get 7-10% returns in the first week following a blood bath and if you are not prepared to buy, you will miss the easiest money.
The intermediate oil cycle runs 25 to 33 weeks and this Friday marked the end of week 30. We should be expecting an ICL any time, perhaps this week or the next. Once we reach the next daily cycle low, we can feel pretty confident that the ICL is also in and I will be recommending long positions in energy.
There is also the yearly oil cycle we should pay attention to. Yearly oil cycles last 6 to 14 months. The last yearly cycle low was 14 months ago. Because oil fell below the $42.20 level which marked the previous yearly cycle low, we now have what is called a failed yearly cycle.
When you have a failed daily cycle, it means you are soon to have a new intermediate cycle. When you have a failed intermediate cycle, it means you are soon to have a new yearly cycle. When you get a failed yearly cycle, it means you are about to get a multi year cycle low. The multi year cycle usually lasts 34-50 months. March is month 49 and it is likely the multi year cycle low will occur this month.
Crude oil sentiment levels reached 12 at the last multi-cycle low. Sentiment levels now are still at 23 which is extreme for a normal ICL. Just as prices can always go lower, so can sentiment levels...... at least to zero anyway.
Once we get a confirmation that a bottom is in...... once we get that daily cycle low, I will recommend buying oil, but not until then. I am not recommending shorting oil either. Just hold tight and expect that we should be near a bottom in a week.
The Speculation page is used for educational purposes and to talk about current trades we are in. The Pit is where we post new trade recommendations. This is also a blog page where you can ask questions, post your thoughts or ask for help. Be sure to use an anonymous name as you may not want your neighbor knowing what you are up to.