Sunday 24 July 2011
The best way to trade is to be in harmony with the trend, which is
why we are always saying that the most important first step is to
identify the trend in whatever time frame you are trading, and also
be aware of the trend in the next higher time frame. The sugar
market recently offered a low-risk entry from the long side, and
we break the decision-making process into its components, as
You can see from the daily chart that the trend in this market is
clearly up, shown by the upward slanting trendline drawn off the
recent May low. In addition, there is obvious bullish spacing. As
a review, spacing arises when a recent swing low, [July], stays
above the last swing high, [February]. It is a sign that the forces
of buying are not waiting to see if previous support will hold.
Instead, they are willing to enter the market immediately, and that
is a sign of underlying strength.
Just prior to the bullish spacing being confirmed, we saw sugar in
an up trend and experiencing a first degree correction of between
one to three days, indicated on the chart. You can see from the
day's low that the downward thrust had shortened, made less
progress, which is to be expected in an up trending market. Then
note the position of the close...it was in the upper range of the bar,
and that says buyers were in control.
One point we did not make on the chart is that the close on the
18th, the third day of a lower low, was similar to the two previous
day's closes, a clustering, and that, too, is a bullish sign. It tells
you that price cannot make any downward progress, and that is
in keeping within the characteristics of an up trend. Essentially,
we have extracted factually observation from the developing
market activity and used them to make an informed decision.
All we needed to do was drill down closer to an intra day time
frame to look for a reason to buy.
The recent highest volume bar, on the 14th, closed just above
mid-range the bar. Volume represents effort. There was a lot of
selling effort as price was declining, but the position of the close
gave us a warning that buyers were winning the battle. Two
trading days later, on the 18th, there is a shortening of the
downward thrust, and price closed well, and off the lows. The
trend is up, and we are seeing first-hand evidence that buyers
are easily handling seller's efforts to go lower.
Next day, on the 19th, we see a higher swing low, increased
volume and price holding. That is our signal to go long with a
stop just under the swing low of the 18th. Subsequent to going
long, there was one more selling effort that resulted in a failed
probe to the downside. Price did go under the earlier session
low, but it found no more sellers and no more stops. All price
can do from there, based on the evidence, is go higher.
On the 19th, there was a high volume bar that produced a close
well off the high of the bar. This was a sign that sellers were still
present. We need to wait for confirmation, and we see some in
the downward ease of move as price quickly sold off. One has to
respect that kind of developing market activity, for it may be a sign
that another retest lower can develop, so we sell half the long
position to take partial profits and reduce risk exposure, one of the
trading management tools we use.
The last chart is an update of the daily to show the results of
gathering market facts, putting them into a context and then basing
a decision on them. We knew the trend, we saw positive signs within the different time frames supportive of trend activity, and it allowed
a low-risk entry, with some profit already booked to minimize risk
exposure, and the balance to see where price will go in an
You can see that Friday's recent new high close erased the negative
activity of the last high, seven trading days earlier. What we are
seeing is how the market confirms its own activity within the context
of an established trend.
Sometimes, it seems so easy. At the time of entry on the 19th, we
had no clue how the trade would develop, and we did not have to
know. All we need do is follow our rules for identifying a market
situation, and then let the market do what it will ultimately do. Now,
we just need to watch for some ending action. The protective
sell-stop has been raised to guarantee a profit and still allow room
for some corrective activity.