A Look at Commodity Charts

(Note from Tim: from time to time, I am going to introduce posts from Slopers who have been invited to contribute. I have made a new category for these posts called Guest, located in the categories cloud on the right column. Thanks!)

Hello ladies and gents, my name is Lucas.

When Mytrade first came out, I became a user and was introduced to Tim’s blog.  I have not posted much, so when I saw he was offering to let some writers contribute, I jumped at a chance to give back to the community.  I have been trading for a few years now, and my main focus is trading simple set ups that are easy to understand and implement.  I think most people build large case files on why their favorite stock or commodity is going up, with tons of graphs/fundamentals/astrology to back it up.  This just seems like too much work to me.  I go through lots of different charts, and I usually don’t get hung up on any one play.  Below I outlined three ideas that came to me over the last couple weekends.  I like the fact that these ideas will probably be “off the radar” for most people.  Opinions are a dime a dozen, but new horizons are few and far between.

I like to go through all the futures that thinkorswim offers on a weekly time frame, not spending more then 10 seconds on each.  I have a 3x5 card above my computer that reads:

• Keep it SIMPLE

• Keep it OBVIOUS & CLEAN

• Keep it DUMBED DOWN

If I cannot see a pattern or a trade within 10 seconds, it usually means that I am trying to get the chart to tell me something that just isn’t there.  Charts don’t make you money, you make you money.  The “dumbed downed” part is to remind me to check my smarts at the door.  If the big guys are buying, they have their own reasons, which are not mine to question.  From there I drill down on the charts I like, and come up with some easy trades based on simple resistance and support.

Most people do not watch cotton (/CT), but it broke out recently from multi-month highs and has since remained above its breakout level.  The 20, 50, and 200 SMA are all pointed upwards, so I would like to be long.  I highlighted two entry possibilities on the charts: either above the highs made on the 19^th or on the support level that it broke out from.  I personally would only trade the highs made on the 19^th as I want to be trading in the direction of the order flow, not stepping in front of sellers.  There is also a very illiquid ETF (BAL) that you can use if you are trading small size.

Next take a look at the Japanese Yen futures (/6J).  I noticed this set up when I saw that its weekly chart (not shown) was sporting two topping tail hammers (or is it hanging man? I don't quibble).  On the chart above I have the daily set up that shows a nice broken trendline.  Unlike in the last chart, where I showed entry areas, this chart has two possible stops highlighted.  I would preferably like to enter this trade on a retracement.  The 20SMA offers a nice entry point for a short, however I always trade in the direction of the order flow.  Therefore, I would wait for a retrace, and then an intraday signal pointing down to enter this trade (i.e. a violation of a higher intraday low).  The exit around the 200 SMA would coincide with a 50% retracement (not shown to avoid clutter) from the April bottom.

Lastly, Feeder Cattle (/GF) caught my eye when it showed a bottoming tail hammer a couple weeks ago right at support. I did some more research and found an ETF called COW representing livestock (a tad illiquid on some days, but c'mon, its called COW!).

COW has a nice double bottom after a prolonged period of distribution, and resistance at $28.  Today it broke out above $28 and then retraced its breakout.  This is the type of play that can have both a short and long term component to it.  A buy here with a target around resistance at $30 could yield a short term upside trade.  The longer term potential is much larger as livestock has been beaten down for years:

A move up to the 40 dollar area over the next year would provide a nice profit.  The way I would handle this trade would be an entry now, a stop under the lows, and take 50% to 75% of the trade off around $30.  The last bit I would throw into a drawer and trail the stop every week or two.

I have found that I tend to place too much faith in charts and technical patterns (and my own smarts for that matter).  The sad truth is that you can make technical analysis sing any tune you want.  There are countless indicators at anytime pointing any which way.  I stick to finding simple patterns on clean charts and then placing trades in the direction of obvious order flow.  After you get on the right side of the market, its just a game of playing good defense and letting the market handle the offense.

Thanks for taking the time to read this, I hope I have given you some ideas and opened your eyes to some sectors that you haven’t been watching lately.  A big thank you goes to Tim for allowing me to contribute.  Best of Luck!

Lucas Tarigal (Trengove)