U.S. Treasureies will probably drop following today's FOMC report. There is precedent that this generally happens following the January meeting. Moore's Research has found that the 30 year bond has dropped 13 of the past 15 years from January 31 to March 8.
Bonds tend to decline from mid/late January into early/mid March. The trend has not been particularly smooth, as there has often a sharp bounce into late February. Nonetheless, bond prices have tended to be even lower several days later.
Sentiment Trader would confirm that seasonally speaking, bonds slip in price between January and March.
From a cycle stand point, bonds tend to trade in 25 day cycles. Today is day 18, so we should expect bonds to begin slipping into their daily cycle low. This drop is what we expect to capture on this short trade. Note also that we have a sell signal on the Commodity Channel Index. These tend to be reliable indicators for bonds.
We also have overbought conditions in the market using both daily and weekly indicators.
So the trade plan is this. We will short the June Bond at 161 or better with a stop at 162. Each full point is worth $1000 so this trade would risk $1,000. The potential is here to ride the price down as low as 155 by March 8 which would be a 6 point profit worth $6,000. This gives us a 6 to one risk reward ratio which is a little better than average.
I had mentioned a few days ago that there are times to use the research provided by Moore's as part of a trading plan and there are times to ignore it. Today's recommendation is to accept their recommendation and to buy soybean oil.
For some reason, none of my software does a great job of showing a Soybean Oil chart so I will just use this from FInviz to illustrate what I mean, that Soybean Oil appears to have bottomed and has given us a swing low as confirmation.
After soybean harvest, processors crush at capacity for soymeal. As they do, stocks of soyoil tend to build. But as winter passes its midpoint, the undervalued soyoil begins a seasonal rise - in part because South American supplies typically are by then minimal and will remain so for a few months.
Moore's Research likes Soybean Oil. Soybean oil has rallied 14 of the past 15 years between January 29 and February 6. Yep....this would be a very short term trade for maximum success according to Moore's.
Soybean Oil (Symbol BO) contracts are 60,000 poinds in size. Every penny is worth $6 so a 50 cent move would be worth $300. If you can get in at $31.50 and the price moves to $35.50, you would have a $5.00 move which is 500 cents. 500 X $6 would be $3000 profit. We would buy the March contract at $35.50 with a stop at $30.50, so we would be risking 100 points, or $600 for the opportunity to make $2,500-$3,000. That is an acceptable risk\return ratio. Margin on BO is only $615 per contract. Again, we won't be in this trade but a couple weeks.
You will seldom see me recommend buying NG but there are enough factors in play that I think would make buying NG worth taking some risk on. There is one big negative to buying Natural Gas which I am saving for the end of this post and it is a concern, but I think if you can get a small NG position on now it is worth the risk.
I do use technical analysis sometimes as a tool for trading. The charts I use are called candlestick charts because sometimes they look like a candle with a body and a wick. You can tell quite a bit from a tradeable asset just from looking at the candle sometimes. I think today was such a day.
Below you will see a diagram of a hammer candle by Investopedia. The candle shows where the price opened, how high the price reached, how low the price fell, and how far the price came back and closed. A candle like this tells you that the price fell hard after the market opened, but by the end of the day had rallied back. The selling pressure was exhausted as fresh buyers stepped in and pushed the price back up. This happens often at trend reversals.
The natural gas chart below shows exhaustion. It shows a market that has become tired of selling. You can see that the price gapped lower at the open, that the price fell early but that buyers stepped back in and pushed the price back up. You have extreme oversold on the 3 and 5 day RSI. In fact, you do not get RSI readings this low but maybe once a year.
Sentiment levels have reached extreme bearishness, confirming that the market is running out of sellers.
So on the surface, this looks like a slam dunk. We have all the conditions in place for a reversal in the NG market. I have seen enough of these types of days to feel comfortable buying NG now, but there are some negatives that concern me.
First, the natural gas industry is sick. Due to fracking, they are producing more natural gas than they can sell. As a result, they are simply burning off the excess of what they are producing. It does not help that this past December was the seventh warmest December in the post-1950 historical record. The fundamentals under the NG industry just are not good.
Then there are the seasonals. January is one of the worst months seasonally, but the month is already over half through.
Moore's Research does not like NG now either. 13 of the past 15 years, if you sell NG January 24 and buy it back February 12 it has been a profitable trade.
$1.95I think this window of time Moore's tracks has been pressed forward due to the unusually warm December and because of the excessive supply of Natural Gas.
So there are big plusses and big minuses in play here. I bought one position because I think price is way oversold, at least temporarily. I could see the price rally back up to the 2.20 area which would be where the 50 day moving average should be in a couple weeks. If that happens, you could pick up 25-30 cents on the trade. NG contracts are 10,000 MMBTU in size. Every penny is worth $100 so a 25-30 cent move would be worth $2,500-$3,000. If you can get in at $1.95 and set the stop at $1.90, you would be risking $500 for the opportunity to make $2,500-$3,000. That is an acceptible risk\return ratio. Margin on NG is $2,700.
Again, there will probably be better trades out there in the coming weeks. Moore's Research is loaded with hypothetical trades the last week of January so we want to keep plenty of powder dry for those trades. Just one here will be plenty for most of you.
Moore's Research has a couple energy trades that are worth trying in the energy sector. Moore's is suggesting long trades in heating oil and gasoline, beginning January 19. The heating oil trade would only last until February 1 while the gasoline trade would last until March 29. Both of these have a history of eing profitable 14 of the last 15 years.
Moore's recommends entering on January 19 but the cycles for both look to be bottoming. I think both are very near Daily Cycle Low's. The oversold levels on the RSI would indicate this even though we have not yet totten a swing. Gasoline is right at the 50 day moving average.
The seasonals for gasoline look very favorable as well for the next few months.
Heating oil is at the 50 and the 200 day moving average.
Energy is not cheap. Despite the recent drop, you can see that crude oil is still near overbought levels. Gasoline and heating oil weekly charts look similar. We will be pushing protective stops above our break evens quickly.
My recommendation is that you buy July unleaded gasoline around 1.82 and have a stop set at1.78. You would be risking 4 cents. The contract is 42,000 gallons in size, so every penny gasoline moves is worth $420. Risking 4 cents is risking $1,680. The opportunity is that gasoline will move back to the 1.92 area rather quickly. This seems very conservative to me. A 10 cent move would be worth $4200 which gives the trade a 3-1 risk reward ratio. Margin on a gasoline futures contract is $5,500.
My recommendation for heating oil is that you buy the May contract around 1.92 and have a stop set at1.88. You would be risking 4 cents. The contract is 42,000 gallons in size, so every penny gasoline moves is worth $420. Risking 4 cents is risking $1,680. The opportunity is that HO will move back to the 2.05 area rather quickly. Again, this seems very conservative to me. A 13 cent move would be worth $5,460 which gives the trade a 3.3-1 risk reward ratio. Margin on a HO futures contract is $5,125.
We got our swing low on Friday. As I had explained on Friday, the plan was to buy gold if the price of gold (POG) either traded low enough to cause the 3 day RSI to reach oversold levels, or if we got a swing low. It happened after the market closed around 4:30 while the price was still settling and by a very slim margin, but it is a swing.
I still believe we could catch some volatility. We could still see the RSI get oversold. If that happens, then I would suggest you add a second position. If we wait for that 3 day RSI to get hit before entering, then we run the risk of the market taking off and us having to chase. We will have a very lose stop on the first position so we are risking more. I suggest a stop at 1530, so you will be risking around $3500. If we buy the second position when the 3 day RSI becomes oversold we will have a much tighter stop on the second position.
You could also take this opportunity to buy a silver position. Think about what you would like to do and let me know.
Recommended entry or exit prices may not necessarily be reflected on the track record. Markets can change quickly resulting in stops being moved or profit levels changed based on new information. Brokerage customers are the recipients of these potential price adjustments made after initial recommendations.