For most of August and the first half of September, the trades we recommended did not perform well. Most of these assets needed resolution by the dollar which way it was going to go. Although we were correct on the direction, it was impossible for us to know the timing. It is clear now however that the dollar wants to go higher. When price finally breaks above the intermediate cycle trend line, we will have confirmation that a new intermediate cycle is underway.
Today marks day 16 of the daily cycle. By the time the dollar reaches the IC trendline I think it would be reasonable to expect the dollar to take a breather before breaking above and resuming the rally. At this juncture, it is also reasonable to expect that the metals, grains, etc could catch a small bounce. If you are shorting at this time that should be fine, but those commodities are not going to go straight down.
Once the dollar breaks out above the IC Trend line, there is a lot of room to go before the dollar reaches the 200 day moving average. It is my expectation that this will mark the end of the dollar rally.....somewhere around 97. I think this rally will coincide with intermediate cycle lows in stocks, energy and the metals. Buying at the ICL in those assets needs to be our ultimate goal.
As I mentioned, the IC Trendline will probably halt the dollar advance for a day or two. This will probably line up with when gold reaches the psychological 1800 support level. I would expect a bounce here but that is all. Once the dollar resumes it's rally, we will probably see gold break through 1800 which should trigger a lot of stops. If you are short, this is when the real fun will begin.
If 1800 fails, and I think it will, the triggering of stops will create a blood bath event. There will be panic selling on behalf of trapped long traders. These kinds of moves can create incredible gains if you are short. Selling continues until there are no sellers left. This is what cleans sentiment and prepares the market for the next move higher.
Gold, stocks and currencies all have a long way to go yet before things ultimately turn and go the other way, but getting to the point where we can be long again in stocks, metals and energies is our ultimate goal. The dollar is key to all this.
I have been thinking the past few days about what is the best way to trade in a market like we are in now, a market that has never existed before with a pandemic and election going on. I know many of our traders are not feeling confident in how things have progressed over the past few months, it has been hard to trade. I will outline a strategy I suggest you try as I have started using it myself this month. When we're looking at the track record since July when I started keeping track of our trade performance, it doesn't match how many of us feel. We have actually had more winning than loosing trades.
This made me start thinking about how it is we are consistently gaining on trades according to the track record yet many of us are either losing money or spinning our wheels in the same account balance range. In no market will we as traders get every trade correct, if that were the case we would all be living in beach houses in Bali right now, retired. This is trading. It is hard and gut retching but if you can handle it you have the potential to make a lot of money.
So what can we do to ensure everyone does well? My thoughts are this: as we are trading in a difficult market and we do not need to be taking big risks. There are so many unpredictable variables in the economy right now. As we outlined in this post on the website on 8/26, http://www.wadeassurance.com/speculation/sentiment-trader-struggles, only 59% of S&P 500 members are trading higher than the 200 day moving averages yet the S&P 500 is near record highs. How does that make any sense? Simple answer, it doesn't in a normal market which we are not in. The Fed is allowing increased inflation and historically low interest rates while we continue to talk about a stimulus package in a range of $500 billion to $1.5 trillion in value. Who knows what they will decide on or when. Soybeans and corn are in their worst time of year for price seasonally and we will have the third highest carryout over the past 10 growing seasons yet price is skyrocketing. None if it makes sense, so if we are going to trade during this time we need to be doing so cautiously.
One thing I have noticed is that after a profitable trade many let their guard down and decide to go bigger with more contracts. In addition, it seems like after every good trade we lose the next one. So we hit a good trade, then go bigger and end up losing all our previous gain. It is easy to do, I have done the same thing. It is human nature, it gives you a sense of reward and you want more. To avoid this I recommend to trade a consistent number of contracts. I am trying this strategy myself to see how it works. This way we are not risking much and are giving ourselves a higher chance of earning money as long as we hit half or most of our trades which we have done looking at the track record. Here is an example: if you want to trade 1 coffee contract then also trade 1 soybean, 1 corn, and 1 sugar. If you want to trade 2 coffee, then trade 2 of everything. This will give you a consistent chance to make money on some trades, you will lose on others.
Again, we will not get every trade right but this strategy can help mitigate risk in a market that is unpredictable. We do not need to be taking big risks in the market we are in. Their is no telling when the market will normalize. I am guessing hopefully after the election but that is an educated guess. This is a recommendation for a strategy from me, do not feel pressured to trade like this. You have control of your account but this is something to consider.
We were caught in a speculative frenzy on soybeans. This rally is not based on fundamentals. Like lumber, this was a trade that was caught by a speculative fervor that you seldom ever see.
If you re-read The Pit post where we recommended shorting grain, you can see that by EVERY measure, soybeans were overbought. You had a sell signal on the CCI, you had overbought 5 day RSI, you had weekly RSI and Stochastics at the highest levels since 2012. Optimism was at extreme bullish levels which only happens every few years. Historical data states that soybean prices begin dropping now.
Well you say, it is because we have a short soybean crop or demand is too great. According to the latest USDA data from the WASDE report, we should have the third highest carryout over the past 10 growing seasons. Look at the stocks to use ratio. This is not old data. This data is but 6 days old.
Grain rallies of this magnitude seldom occur in the fall. The only such rally I can find in this same time period we are in presently occurred in 2012 which was a terrible drought year. This year will probably be a record crop yield.
You could say many of the same things for Corn. Even after drought and wind damage to the Iowa corn crop, the USDA estimates the 20-21 crop will give the largest carryout in the past 10 years according to the data I have.
So how did we get this trade so wrong? The Agriculture is presently in the midst of a speculative frenzy. There are no tools to help you manage a trade once speculators pour into the market. Just like the frenzy which hit lumber, the best thing to do is to get out of the way.
In a normal market, you can ride these kinds of moves out because prices will always come down from excessive levels. This was the reason we did not place stops and this was the reason we held the positions so long. This time it was a mistake.
There will be a time when a LOT of money will be made to be on the short side but I am not sure I can gauge when that will be.
This is the minute chart on the NQ. You can see where the selloff really got going. With just under an hour left in trading, we could see the government step in again with a rescue but there just is no guarantee. I had hoped we would get a large enough rally today that we could get knocked out above our entry but most of us suffered a small loss. I suggested going small this go around as I realized buying this late in an intermediate cycle has more risk associated with it than in the first or second cycle. The safest strategy moving forward will be simply to sit on the sidelines and wait for a real ICL.
The intermediate cycle for stocks is 24 weeks old. The intermediate cycle for gold is 25 weeks old. The intermediate cycle for crude oil is 20 weeks old. The trading is going to be difficult in the major things we trade.
There are quite a few people who are short the euro and I along with most of them were getting a little nervous, but the short term indicators suggested the euro probably did not have much left in the tank. The euro short will benefit from a stock market selloff as that should force the dollar to rise. That is just something to keep an eye on.
Soybeans have been on a tear lately. The November Bean contract is only 8 cents away from the contract highs. The commodity Channel Index will be giving a sell signal now any day. This would only be the second sell signal the Nov contract has had over the past two years.
Soybeans have only had weekly sell signals given th the Weekly CCI 4 times over the past 10 years. We are about to have one of those signals.
Over the past 10 years, we have only had optimism at excessive levels 6 times. We are at excessive optimism now.
It is my belief you should be aggressive selling soybean, and I would not be afraid to begin selling 2021 soybeans now.
Back in late July, I wrote a post titled "Why Do We Trade" which included a story about a little girl named Leah Faris who has a RAC-1 gene mutation. After posting the story there were several traders who expressed interest in helping this girl's family with a gazebo which would greatly enhance the lives of Leah and the rest of her family. The gazebo was just completed this past week!
The final cost of the project was $7500. If you would like to help offset the cost of the project, please visit the Accessible Adventures of Central Kentucky website to make a tax deductible donation. The bill for the gazebo is due this week and your support is greatly appreciated!
One characteristic of traders is that most suffer from ADD. They are not satisfied to sit still very long and they are always looking for something new to trade.
Our track record for August was good with only one losing trade and six winners, but we closed out the Euro which was a July trade with a loss. We have to be mindful how a loss affects our trading. Most of us cannot get around the human tendency to try to "get it back" on the next trade. We can get it back if we are patient and wait for good set ups. We are about to get several of those.
I think we will soon have daily cycle low's in the stock market and energy. We should get opportunities as soon as tomorrow to buy. The NASDAQ has not had an oversold RSI reading since March. We could have this tomorrow. I am not sure we will get a swing low or a hammer tomorrow but we could. The government frequently intervenes on Monday's to get people to start buying for a new week of trading. I am thinking we could try to step in before the market closes on Friday at a good price to take advantage of the intervention.
Margin on the NQ has increased to $17,600 and is $1,760 for the mini's. I will find a way to explain how this could be the starting place to build a large position in the stock market. You don't need to start out with a full size contract, but everybody should be ready to buy at least one micro.
I also believe we could be reaching a good place to begin an energy trade....most likely crude oil. If you are a farmer, this could be a good place to begin hedging your diesel fuel needs, either filling your tank or buying heating oil futures. Crude and heating oil are already at levels that could be considered DCL's. We await confirmation for a long trade in energy.
So let's be patient. Lets try to do a better job position sizing. If we produce 6 good trades a month spread around different assets, we should not be getting caught in one trade that sets us back. There are several different things we are looking at and these are two of them.
This is not a short soybean recommendation. This message is directed to our farmer friends who actually have physical soybeans in the field. Though the bean crop is deteriorating in places across the country, there is still a very large crop to be harvested. Beans have had a nice run up in prices and if history holds these prices won't hold long. Soybean sentiment values become overbought only every year or two and we are at one of those moments now.
The weekly chart shows soybeans more overbought than they have been in years. This level is consistent with intermediate cycle tops.
The daily November bean chart is showing prices stretched well above the 200 day moving average. They are due for a pull back at the very least. The commodity channel index will be giving us a sell signal any day. Yesterday's price action left us with a shooting star candle and price overnight left us with a swing high.
Moore's Research is bearish soybeans for the last half of September. They could be a little late this year.
Seasonally speaking, September is one of the three worst months of the year for soybean prices.
If you have plenty of storage and don't need the cash we could have better prices later. You typically should reward the market. If you have beans that need to be sold however, there is no time like the present to get current and future soybeans locked in.
The Speculation page is used for educational purposes and to talk about our opinion on trades and what is going on in the market. All trade recommendations are made in "The Pit". 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. If you have any questions feel free to reach out to us via email.