MTA EDUCATION SEMINAR 2005 • ADVANCED CMT TOPICS • Commodities Mike Rocca, CMT Cargill, Inc. World Trading Unit Agricultural Option Trader & Technical Analyst
BACKGROUND • August 1992 : Hired as Accountant • 1996 – 2000: Full Member Chicago Board of Trade representing Cargill Oilseeds • 2000-Current: Trade option Book for corn, wheat, soybeans, soybean meal, & soybean oil • Technical analysis on those and other commodities as well
Technically Analyzing: Commodity Futures for Cargill • Begin by providing a comprehensive weekly analysis on all 5 specific commodity futures markets and outside as appropriate • Comment on last week’s performance • Identify and comment on overall broad pattern • Comment on short term technical points/patterns • Comment on Fund positions & expected “trigger” points • Identify Stop & Reverse points – if any • Project weekly range • Advise technical game plan For purposes of this meeting, we will focus solely on CORN…….
Outside Markets • Commodity Research Bureau Futures Index (CRB) • Basket of 21 actively traded commodity markets • The accepted measure of the overall price and trends of commodities.
5? 3 1 4 2 • Definite Uptrend • ”Possible” completed 5 wave pattern • 300 psychological & 290 key channel support levels identified. • Conclusion: currently sideways to corrective px action, approaching key support levels. 3 1 4 2
US Dollar Index Futures Contract • A trade-weighted geometric average of 6 currencies • Symbol = DX
Downtrending momentum significantly damaged • Potential “basing” action occurring • 85/87 key resistance • Conclusion: sideways to higher
Outside Market Conclusion Consistent with John Murphy’s Intermarket Technical Analysis text, we may be seeing a L/T shift whereby strengthening $ will put broadpressure on commodities as measured by the CRB.
CORN • L/T weekly continuation chart
Broad pattern interpretations such as Elliott Wave Theory is complicated by the expiring nature of futures contracts and resultant spreads. This can generate significant gaps in price as old futures contracts expire and new futures contracts become the “lead” month. • Nonetheless, it is important to have broad based opinions. • Therefore, basis below, conclusion is that nearby corn today is at levels that previously have proven to be a “value”. • Specifically channel has been violated. Prices then failed at trend line retest. • Pattern of “basing” now expected.
Seasonal tendencies must be acknowledged • Employ detrending approach • Moore Research, Inc. for specific futures seasonals
Detrending approach reveals the tendency for corn to post lows in August. Aug 02 Mch 04 Oct. 97 May 00 JlY 03 Aug. 00 Nov 04 Aug. 98
Value and Open Interest • When analyzing commodities, it’s imperative to focus on the futures contract with the highest open interest. • CN5
Draw trend lines as first step in identifying levels of support and resistance. Head Price breaks out ofdown trending channel in gapping fashion LShldr Rt shldr Prices failing at 210 resistance Neckline
Determine if the market is trending strongly upward, downward,or sideways……
Overlay 4,9,18, 50 & 100 day simple moving averages to be used if trending bias is determined. -4 -9 -18
Identify what short term momentumoscillators are saying in the event myoverall bias is sideways/range bound.
The funds have become an increasing force in our markets. • The commitment of traders released every Friday requires constant monitoring.
The CBOT is expanding fund limits to accommodate a larger fund presence.
When price crosses 50 day simple Moving Average AVD • MACD crosses its ZERO line, typically the fund reverses position
Technical Summary for CN5 • Current technical momentum is slightly bearish • CN5 205 support is vulnerable on the next test • 200 support is the next psychologically important support • The nearby continuation chart suggests price action should continue to GRIND to the low 190’s possibly 180’s in late August where detrending approach would suggest another seasonal low may be in.
Technical Summary for CN5 Continued • On the upside 210 consolidative lows & 210/212.50 gap represent first resistance. Current slightly negative technical momentum has been generated off failure of same. • 213/215 BB mid-point next resistance that if overcome dependant on timing would likely generate a MACD cross from (5) that would more strongly suggest 100% exiting of shorts. • Violation of 217/220 (50 & 100 day moving averages) would generate a MACD cross through its zero line and suggest new longs.
Technical Summary for CN5 Continued • Projected Range 212.50/200 • Tech Game plan: Tradable shorts tonight. Profits taken 205/200. Shorts stop loss on close + 210.
Conclusion & General Comments • Broadly the same rules apply when applying TA to commodities as Equities. • Challenges arise when analyzing L/T continuation charts due to the expiring nature of commodity futures contracts. This limits the application of certain approaches including EWT & gap expectations and interpretations. • One of the unique aspects of commodities is attention to fund positions & behavior; they can often frustrate those paying attention to only fundamentals.
Conclusion & General Comments continued • Discipline: Commodity markets are heavily influenced by periodic USDA Supply & Demand reports. This absolutely requires the technician analyzing commodities to have predetermined stop losses and profit objectives on every trade.