Thursday 14 January 2010
Most like to entice prospects with their trading acumen or expertise.
Here is a trade we recommended that went sour, quickly, as in limit down
and cannot get out. There is a no-reponse-fits-all that addresses any
given trade, but rules, discipline, and common sense are usually the best
way to respond to every situation, positive as well as negative. Going
through a live losing trade can be helpful, for we are all confronted with
We recommended long positions in March Corn on 4 January, as it
rallied to trading range highs while exhibiting signs of absorption, where
buyers are absorbing sellers for a directional move, in this case, up.
The first chart, a daily, shows how Mar Corn made a new high and new
high close, and a long position was taken that day. The remaining trading
for the week was contained by that Monday's wide range bar, and the
closes were mostly upper end of the ranges, which is classical absorption.
An important element to trading is consistency. Because we follow charts
only, with no need for other kinds of market imput, we have had positions
going into reports in the past. Sometimes there was give-back, and just as
often, not, [which is not saying that there were positions everytime reports
came out in any given futures]. So, going into the report, we were
comfortable with the market structure, plus we had a sell stop at 412. As
it turns out, the overnight low, prior to the report, was 412.5, so the position
missed getting triggered by half a cent, $25.
The report was negative.
How How about limit down, all offers, and zero buyers negative.
What about the stop?
Price opened through it...there were some executions, but our stop was
not among the fills as price quickly went limit offer the rest of the day. We
kindly indicated on the chart that the signs of absorption were negated.
Overwhelmed would be more accurate.
Okay..it is a live trade. What would you do? Distant Dec 2010 is still
trading. Beans and wheat are still trading, lower, but not limit. Some
would choose to sell beans against the position, as a "hedge" against
lower prices next day.
We chose not to sell anything against the limit down position. Why
compound the problem? Limit down is shown on the second bar from the
end. What did we do? We canceled the sell stop, which had become an
unfilled market order.
Isn't that reckless?
If corn were to come off limit, our fill would have been the worst of the day,
presuming that if it did come off limit, there would likely be a reaction rally,
of some degree. The next chart, a 60 minute, shows the activity as it
occurred intra day.
We are still in a live trade. You could have sold something else against
the long position, or kept the stop alive and get out at market at the next
available trade. Some may have chosen to sell beans or distant Dec 2010
Corn against long Mar Corn and bleeding losses, as it were. Many would
have waited for the market to trade and get out as best as one could, and
from the waterfall look of the 60 minute chart, the damage was not gentle.
They were taking no prisoners in the corn pit.
If you waited to sell at market on the first available fill, you would have
been filled around 382 when trade resumed in overnight hours. Why did
we chose to cancel the sell stop? We would give up control of our position
to the dictates of the market. Some may see that as imminently sensible.
Not us. If you have made your decision as to how you would have handled
this trade, up to this point, we will say we chose to stay with the trade
because of our rules, discipline, and even common sense. Remember, we
took the trade because corn had the strongest chart structure, of the main
grains, and it was exhibiting absorption, so we were buying relative strength.
The reason why we chose to remain with the position, despite a limit offer
day and another 23 cents down, on top of the already 30 cent limit move
was the application of our rules and discipline, and the clue is found in the
first chart, if you want to go back and find it. It is not too late to change your
mind, if you can provide a good reason.
Here is the first chart, but with one simple horizontal line added. It comes
from the swing low of 2 November at 372.5. If you look at the wide range
breakout to the upside bar of 4 October, on increased volume, it is where
corn took a jump higher. From there, corn went into a trading range, going
into the report on Tuesday. The breakout was retested on 2 November, the
swing low we just referenced. It will likely turn into support at some point in
the future. This past Wednesday became the future in reference to the
2 November support point.
Our thinking was, the damage has been done. Support is not too far away.
The market was the strongest grain and showing positive market activity.
Those things do not just evaporate...although in this business, it is always
possible, for anything can happen. We figured that once the selling wave
was complete, all the weak and panicky longs would be washed out.
You have to ask yourself...if all that selling is going on, who is buying?
Good question. Our answer is, smart money, stronger hands, and good
company in our estimation. Was our decision to hold a bad one? It is
always about results, so take a look.
Those who wanted out were out at 382, as we indicated. Price did go
right through 372.5 support, but briefly, as it traded under 370. Look at
the close by the end of the day...high end. That tells us that buyers came
in and took control, driving price to the best level of the day.
Remember, what is important is HOW a market responds to a support level.
You can see that the response was unequivocally positive in an very
negative environment. The lows going through 372.5 support tells us that
stops under that level were triggered and washed out. Look at the volume...
huge! The fact that price closed on the highs after filling all the orders from
the previous limit down day and triggering all the stops under support, tells
us there were no more sellers in the market, and THAT is why price rallied
so strongly by the end of the day. By the way...all those longs that got out
and/or were stopped out? They become buyers in the future...new demand,
at some point.
At the time when we copied these charts, corn opened lower, down about
6 cents from Wednesday. We viewed that as a good sign. Why? The last
thing you want to happen in a weak market is for price to open higher. It will
encourage more selling.
Another point to remember...demand [buying] always comes from lower
levels. Once price opened lower, it was up to buyers to prove they could
hold off sellers. That was proven on Wednesday when price rallied
immediately after probing to new lows at 368. The rest of the trading day
found price holding near the upper end of the range. That tells us that
price was consolidating gains, [holding them], and not correcting lower.
Same thing happened on Thursday, once price opened lower...the rest of
the day held mostly above the open and lows, another positive response
Where were all the sellers, if they were in charge?!
When we decided to stay long, that was our reasoning. We got in the
position based on rules, and discipline said that the reasoning was the
same, but the market parameters had changed, so it was important to take
a hard, cold look at what could happen. It is quite possible the the lows of
the trading range were just recorded. They will be retested, to be expected,
but if that is the case, price should work higher from here, and we may get
out at a more advantageous price.
It is equally possible that we can suffer a greater loss, for the stop was
moved down to 366 after trading commenced and the low was established.
The trade is still live. The point of this exercise is to always look at the whole
picture, [past support, in this instance], and do not loose sight of what could
happen instead of blindly giving in to market pressures of being in a losing
We always welcome comments and questions. Visit our website: