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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
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  • Corn And Wheat - Low Risk Buy. Buying At The Danger Point. 0 comments
    Oct 5, 2010 10:25 AM

    Tuesday  5 October 2010

    Note:  This is about grains, but from a technical perspective, a chart
    is a chart, and what is described here can be any stock or stock index,
    and you will see these set-ups throughout the stock market.

     There are several bits of information going on in the developing
    market activity of both wheat and corn.  The charts will show this
    special situation that presents a low-risk entry at what can be called,
    "buying at the danger point."  What is the "danger point?"  It is when
    price is at a particular location in developing market activity that says
    buying, right now, is where the risk is low should the market fail and go
    lower.

     In addition to buying at the danger point, the other pertinent
    information relates to knowing the trend of the market you are trading,
    and that will also be addressed.  To the charts we go!


     Weekly wheat shows a very strong move that culminated in a huge
    wide-range bar that had a mid range close, 2 August 2010.  From the
    June low to the August high, a 50% retracement is shown on the chart.
    Why use 50%?  It is an indication of how strong or weak a trend is. 
    When price can hold above the 50% area, it shows greater strength
    than a market that retraces more than half of the total gain.

     What is like a beacon in the night on this chart is the week labeled
    "1."  The range is wide to the downside, the close is weak, on the low
    end of the range, and volume increased.  What this information
    conveys is an expectation for price to continue lower.  Over the
    weekend and coming into early trade on Monday, the range was
    small prior to the day session open. 

     Where were the sellers to press this market lower?!

     WZ W 5 Oct 10

     This is the same chart, but we drew in a horizontal line across the
    previous lows that held in the last three weeks in August for it should
    act as support.  In addition to a lack of downside follow-through, the
    small range developed exactly at a point of previous support, and this
    activity is occurring above the 50% area.  We have two independent
    pieces of market information confirming what we think will be an
    opportunity to buy at the "danger point." 

     You can see how seemingly tenuous such a buy is, given that the
    market has been selling off sharply, and that is why it is called a
    danger point.  In reality, if the analysis is correct, it is a relatively
    safe place to buy because the risk is less than if one were to wait for
    higher prices to confirm what may become a support area.  From our
    perspective, the lack of downside follow-through at an identified
    support area IS the needed confirmation.  Any ensuing rally will simply
    be validating the observation.
     
     Keep in mind, larger time frames, like this weekly chart, are not the
    best for timing, so we go to the lower daily time frame to see if we can
    justify the trade.

     WZ W2 5 Oct 10

     We immediately see important information from developing market
    activity that says this is a go!  Bar 1 breaks  under a clearly defined
    trading range.  The bar is wide to the downside, indicating ease of
    downward movement, exactly what you want to see in a market
    headed lower.  Note the position of the close, however.  It is near the
    upper end of the range.  The upper-end close tells us that buyers
    were present, and they were also stronger than sellers, otherwise
    the close would have been lower.  Volume was also the highest in
    over a month.  Just when the market is "showing" weakness by
    breaking support, the developing market activity is telling us buyers
    are overcoming sellers.  This is a red flag for shorts, at least those
    paying attention to this market information.

     What happens next day?  A lower low and a low end close at day 2. 
    Isn't that a sign of weakness?  Depends on your point of view.  We
    see it as the message from the market saying that even though
    price went lower and closed lower, the volume was less.  Less
    volume means selling pressure is drying up.  What was the net effect
    of the lower low?  It barely made any downside progress telling us
    sellers are spent.  That was last Thursday and Friday.

     We already set up the weekly observation, and on Monday morning,
    we see how small the overnight and start of the day session range is. 
    This is where to buy and buy NOW!  That is exactly what we did,
    paying 652 and placing a stop at 639.  All that is left if to watch how
    the market develops from here and just manage the trade.

     Take a look at corn.

     WZ D 5 Oct 10

     The situation for corn is the same as outlined for wheat, with one
    major difference.  Look back at the development of price on the
    wheat weekly chart, and compare it to corn.  The position of price
    in the corn chart is much stronger than wheat.  Wheat is more of a
    sideways trading range; corn is still in an uptrend, and well above a
    50% retracement.  Corn is relatively stronger than wheat, and that
    makes corn a much better buy BECAUSE OF THE TREND!

     CZ W 5 Oct 10

     The daily chart shows the same information we just described in the
    wheat charts.  Look at the breakout on 3 September.  Once breaking
    above previous resistance, it becomes support into the future.  As it
    turns out, the horizontal support line, around 450, is also the 50%
    retracement area, a double-strength effect.

     Look at the activity just after the 3 September breakout.  Price traded
    sideways for three days before working higher.  Then, look at where
    the market was on Monday morning...exactly at that same area of
    price consolidation.  What you are seeing is a retest of the breakout,
    and the time to buy is NOW!  We went long CZ at 464.

     Now, the significance of the trend is this:  as of this morning, Tuesday
    morning pre-opening, wheat is where we went long.  Corn is 13 cents
    higher.  We talk about the importance of identifying the trend and
    selecting those situations which have a greater relative strength.  Corn
    is relatively stronger than wheat, and the difference in results, so far,
    reflects that.

     Long corn and wheat.

    CZ D 5 Oct 10

    Themes: S P
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