A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Plunge or Just a Pull Back—How Do You Know? (Part 1 of 5)
08/18/2008 12:00 am EST
Markets trend, congest, and then they can return to the original trend or start an entire new trend in the opposite direction. Reading the signs along, or the ‘Market Maps’, is interpreting the context of the market at any given time. Good traders then make decisions on the most probable path price is likely to take—and if they cannot discern a probable path, they wait patiently until the market shows them one. Once they’ve chosen a probable path for price, they look for high probability trade entries with acceptable sized risks and quality risk reward ratios. If they can find all these things, they enter market orders and wait to see if the market let’s them in. And then the fun begins!
There are many things in a professional trader’s toolbox to help them make these trading decisions. Some traders rely strictly on technical analysis, some on fundamental analysis; some use a mixture of both. And each trader has a different mix of tools. For example, my favorite technical analysis tool is the Andrews Median Line, though I also use tools like geometric retracements [most traders refer to these as ‘Fib’ retracements even though they were used by the Greeks in Euclid’s time] and measured movements. I certainly look at the qualities of each and every price bar as it opens, unfolds and closes to detect whether buyers or sellers are in control and how each bar relates to the prior bars—I suppose you’d call this ‘tape reading’ these days.
And although I don’t ‘consciously’ rely on fundamental analysis, my educational background and 37 years as a professional trader mean the fundamentals are generally there rolling around in my head, so they do come into play, whether I like to admit it or not.
I thought you might all enjoy looking at a series of charts and playing a game of deciding ‘which is the real outcome’! Of course, to do this, I’ll trust you won’t look at current prices in this market for the past several months—do yourself a favor and just go along for the ride and see how each possibility plays out. There’s no wrong answer. All of these could have happened, but one of them did and was an actual trade.
We’re going to be looking at the soybean futures, so before we start, let me give you a fundamental clue that many of you don’t know: When trading grains, there are two insider secrets I am willing to offer you that come directly from the Chicago Board of Trade Grain pits:
- There is a famous weatherman on Super Station WGN [or Channel 9 in Chicago]. His name is Tom Skilling and he ALWAYS gives a ‘tease’ of his major noon weather forecast that starts at 12:20 pm CST at 12:06 pm. If you are ever in Chicago while the grain pits are active in the summer, you can see the pit trading come to a halt at 12:05 pm CST as the traders listen to Tommie’s ‘tease’, hoping to get an edge on the rest of the trading world that waits for his ‘full’ forecast at 12:20.
- If you have a grain position in early summer and the market is trending, always remember that once the first tropical depression forms [or the first hurricane], all bets are generally off in terms of the trend. If it’s been a hot, dry summer, this generally signals the breakup of that weather pattern. So if you have a nice chunk of profit in a grain position and the first tropical depression hits, you might think about taking your money and standing aside for a bit. OR if a major trend has stretched the market out in one direction or the other, that first tropical depression may be the first crack that leads to a change in trend!
One last thought before we start with charts: I don’t know why geometric retracements or progressions work—and I consider 38.2 percent, 50 percent, 61.8 percent, 1.272 percent and 1.618 percent the major retracements and projections.
One interesting suggestion was put forth in a work, Stalking The Wild Pendulum, by a fine theoretician named Itzhak Bentov. He pointed out that if you put two or three pendulums in a sealed room and started them at random so that they were out of synchronization, they would exert an unusual influence upon one another and would soon be swinging back and forth in perfect unison. He gives many other examples of this same phenomenon throughout the universe and even within our own bodies! Perhaps the vibrations that make Median Lines and Geometric contractions and expansions are similarly governed and so often find themselves stabilizing when buyers and sellers are about equal. And then once the market has reached its most efficient state [recovered its energy by resting once it is within this synchronized state], it then begins anew on the most probable path. I’ll let you decide if this idea makes sense.
Let’s look at the soybean futures market now!
You can see on the chart above, price has been in a very strong up trend, moving from just over $10.50 per bushel to a high of almost $16.37 dollars a bushel in a rather short time. I can’t point to any one sign of weakness, but I see some cracks that might lead to something: Price left double tops at the high of the move and then turned lower and broke below a mini Swing Low—obviously the last two bars on this chart are very weak price action. Note also that the sell off came on wide range bars, so there are eager sellers, people that WANT to get out, either because they bought near the recent highs or because they are watching their profits vanish and they want what’s left of their money NOW.
More tomorrow in Part 2
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