Seeking Alpha

edgetraderplus'  Instablog

edgetraderplus
Send Message
Michael Noonan Edge Trader Plus Michael Noonan is the driving force behind Edge Trader Plus. He has been in the futures business for 30 years, functioning primarily in an individual capacity. He was the research analyst for the largest investment banker in the South, at one time, and he... More
My company:
edgetraderplus
My blog:
edgetraderplus
  • Copper - A New Move Up In The Making? 0 comments
    Mar 17, 2013 6:42 PM

    Sunday 17 March 2013

    The last time we analyzed copper, we were buying at $3.75,
    anticipating an upside rally to the $4 area. Next day, we were
    stopped out with a few cents loss, and price has dropped recently
    to as low as the $3.47 area. Based on the speed of the decline and
    the heaviest volume along the way down, copper should drop even
    further, or so one might think.

    Past history on a chart is important, but the most important part of
    all is the present tense developing market activity because it is the
    culmination of all previous efforts. We take another look at what the market is saying about where it may be headed.

    The ultimate question to always ask is, "Why?" Why did the rally or decline stop here? Why was the range so wide/short? Why was
    volume so heavy/light? After the "Why?" question would be "Who?
    The latter helps explain the former. As in life, everything in the
    markets happens for a reason. Let's see if we can "reason" what
    is going on.

    Reference is made to the wide range bar down back in September 2012. "EDM" stands for Ease of Downward Movement. This tells us
    that sellers are in control and are totally overwhelming buyers who
    are getting crushed on the way down. Why did this happen?

    If you count back six and seven bars earlier, you see a small retest
    failure high of the last failed high in April, and those two bars told
    everyone who cared to observe them that the market was now in
    the hands of sellers. After those two bars, you next see a three bar
    rally. Why were the ranges smaller and on less volume? Because
    demand was weak, and that was a poor response to the selling
    effort. These clues were in place before the EDM bar in September.

    Yes, this is a hindsight analysis, but you need to understand how
    markets function because they repeat themselves over and over.
    When you understand past behavior, you can better understand
    present tense behavior. The opportunity for making a trade, and
    preferably one that has an edge, always exists in the present tense.

    Long story short, instead of continuing lower after the EDM on
    heavy volume, price went sideways. Why? Who were the sellers on
    the way down? The public and weak longs. Who were the buyers?
    The same ones that started the selling back in April and August.
    What you see was a transfer of risk from weak hands into strong.
    Controlling influences, aka "smart money," were doing the buying.

    The series of boxes show the initial support, then the first resistance, which not so coincidently stopped at the poor 3 day
    rally response back in August. Ping-pong back and forth, support
    then resistance, the boxes get smaller. Why?

    As price moves along the RHS, [Right Hand Side] of any trading
    range, including a contracting one, it is getting ready to move
    directionally, one way or the other. The forces of supply/demand
    are more in balance. Balance leads to imbalance. Would it be helpful
    to know in which direction the next move will be? Here, no need to
    ask "Why?"

    In between the last two boxes is a wide range bar lower with a poor close, and you can see how it occurred on the heaviest volume.
    Why and who are crucial to know. We said the Who sometimes
    explains the why. Who was doing the selling, and more importantly,
    who was doing the buying?

    Who was selling? Once again, the public expecting higher prices,
    along with other weak longs who could not financially withstand the decline. Who was buying? Controlling influences, once again. Always remember, patterns repeat, over and over, not always in the same
    fashion, but similarly enough to rhyme. From that rhyme comes
    reason.

    Note how abruptly the decline stopped over the last three weeks.
    No further downside, and closes have clustered. A clustering of
    closes is a pause, just before a market moves lower from the
    preceding momentum, OR, the pause can be stopping action to
    reverse the activity that has been moving lower.

    The market does not always send out invitations to reveal its intent,
    but there is a lot of logic in HOW price moves and develops over
    time. Maybe a closer look at a daily chart can add to the logic we
    attempt to assess?

    CPK W 17 Mar 13

    How a market responds to an obvious move gives important
    information. In the weekly chart, we discussed how a three-day
    rally was a poor response to a two-day decline, back in August
    2012.

    Applying the logic from the weekly analysis, we can conclude that
    the public and other weak-handed longs were selling with abandon
    when price cascaded lower with impunity. In just 5 trading days, 3
    months of buying effort was erased. Why?

    Why? The Who wanted in, but at much lower prices. Note how
    heavy the volume was. Compare it to the April 2012 volume when
    sellers, [the Who], were selling whatever buyers could stand, just
    before price collapsed lower in May. Note the drop in volume. Most
    of the smart money has already sold at higher levels. Volume then
    picked up again in late May and early June. Why? The you know
    Who were back buying in their short positions.

    Logic tells us that it was smart money buying on the way down, at
    the end of February. Volume decreased in March because almost all of the public and weak longs were spent. The response to the
    waterfall decline has been relatively muted. Why? No more sellers.

    If there are no more sellers, what is likely to be the next important
    move? Demand will be on control, and price will start to rally. The
    public, just having been taken to the cleaners will not trust the
    rally, or not be able to buy anymore, and price will rise without much resistance.

    That is one possibility. The other is, copper is going much lower, and the response is just a pause before that event. Which way?

    Answer: we do not have to know in advance. We do not have to
    guess, or worse, "predict." Instead, all we need to is let the market declare itself, confirming its next direction. What will that
    confirmation be? Ease of Upward Movement, [EUM], on increased
    volume, or EDM on increased volume. Once the market declares its
    intent, and it will, we just go with the flow.

    What would be some clues?

    CPK D 17 Mar 13´╗┐

    The above daily chart shows total volume. The one below shows
    individual contract volume. We look at numbers 1, 2, and 3.

    1: Highest volume occurs at the low, and the close is off the low.
    We always say the market is the BEST source for information. Here,
    the market is telling us smart money is doing the buying based on
    the heavy volume. Why? The public does not generate heavy
    volume. It reacts to prices by panicking out at the lows, unable to
    withstand any more losses or meet margin calls. Logic gives us the
    answers to Why and Who.

    The location of the close, off the bottom. lets us know buyers were
    present, or else the close would have been lower, and maybe even
    the range. A decline in volume over the next four TDs tells us selling pressure has abated.

    2: Wide range up, strong volume. [Re-read "Answer" paragraph
    above last chart]. We see a sign of buying when sellers are
    supposedly in control.

    3: Note the selling "response" to the buying at "2." After 3 TDs of
    effort, price has been unable to break under the low of the wide
    range up bar on increased volume. Why[not]?

    Logic would suggest that copper is being accumulated here, or price would have dropped lower. An upside reversal from area 3 would be
    another important "tell" as to which way copper is likely to move next.

    Why, Who, and a little bit of logic takes the "guesswork" out of
    which way to go. Waiting for confirmation removes some of the risk
    in taking a position, and "prediction" is an unnecessary element in
    trading. Can we be wrong? Absolutely. We will take potential trades
    like this all day long, knowing the risk is defined and the odds offer
    an edge. Some will result in losses, but the winners will more than
    compensate.

    Source: The Market.

    CPK D2 17 Mar 13

Back To edgetraderplus' Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.