Tuesday 28 August 2012
Rules are important to have, and once had, critically important that they are followed. Our primary rule is identification of the trend in each time frame and to trade only in the direction of a known trend. There have been times when we talk about a danger point. It is when price is at important support/resistance within a defined trend, and there is a slight possibility for a turnaround. When these situations can be identified, the risk is often the least exposure for taking a position, which will be clearly against the trend, and a violation of an established primary rule. This would be a special rule and not a breaking of one.
When you follow rules and only trade based upon established pattern recognition within the context of the trend and price location, the underlying futures are of little consequence. It could be coffee, gold, corn, crude oil, or even sugar, the topic of this article. Essentially, we can make a presentation with little care of what the underlying futures may be. This is because a chart depicts supply and demand, and the point is to understand which is the likely controlling force.
Sugar is in a similar situation as was coffee, last week. We often comment on the fact that markets are constantly testing and retesting previous support/resistance areas, and sugar is retesting a previous support area, conveying a "story" at the same time. Let us introduce the charts and make this narrative relate to visuals.
Clusters of closes typify a resting spell for price, either for continuation of the trend or for a turnaround. The monthly charts do not often get clustering due to the higher time frame. We included the opening as a part of the clustering at "A," because it was also the low just prior to a sustained rally to 2011 highs.What marks "A" as potentially important is that it can be support for a future retest. We see that at "B," "C," and "D." Also note that support/resistance does not unfold in a straight line.
The failed probe lower at "C" becomes key. What we know for sure, because of "C," is that when price went to new lows, it did not uncover any more selling, and whatever stops existed were not sufficient to have an impact on the market. We now know for certain that there is no selling pressure under that support area, and it is likely to hold. What an important piece of information carrying forward...an edge.
The same points from the monthly are shown on the weekly, for comparison and synergy. What stands out on this chart is the sharp increase in volume when the low at "C" occurred. Why was the volume so high? It shows a transfer of risk from weak holders into strong hands, and the volume turned price higher.
Given "A," "B," and "C," we are looking for a retest at "D," one that will successfully hold at/near "C" and show smaller ranges, which are evident as the support level is approached.
Interest was piqued at the third bar from the right. It followed a wide range bar down that had a poor close and increased volume, all indicators that sellers are in control, as they should be, in a down trend. But that small range bar says the brakes were applied to sellers efforts and buyers stepped in to stop them cold.
In order to act, going against the trend, but at a "danger point," where price could turn instead of continuing lower, we needed to see a strong move to the upside. A position seemed warranted on a
rally, next day, at 19.84. The 20 minute chart explains why.
For all the reasons given, from the monthly to this intra day, we felt comfortable in taking a trade here at a danger point. The risk was more than reasonable. From the stopping range low of the previous day, price rallied smartly with wide ranges and strong closes, exactly the character we wanted to see in a rally off the low.
When price rallied above the early morning range on a large volume increase, we wanted to buy a break, which is how the 19.84 buy area happened. Turns out, price went lower by the close, but when we saw the sharply higher volume and mid-range close at the low of the day, it seemed like the market was saying the trade will work.
The minor break under 19.50, next morning, did not attract continued selling or new volume, and by the day's open, price began recovering. The strong rally at the end of the day, backed with equally strong volume, added more confirmation to our analysis and expectations.
We now await the results.
This trade has similarities to the recent coffee trade made last week. If you have not read the article, see Coffee - Context And The Danger Point, click on http://bit.ly/RfRwkD. This type of market read for both trades is what making decisions are all about.