I’ve lost the illusion of sensing I can see good opportunities on the grain markets.  And, the softs seem a wee bit off kilter for my tastes.  So, I’m pairing my focus at the start of this week to metals, currencies, and indices.

Options traders remember we have expiration coming on Friday!  The next expiration will be December expiration at which point the smarter trading community will already be taking position for the new year’s trend.  It’s not too early to start thinking about 2010.  This markets may be able to run higher, but, not forever.

While I’m on the subject of options, keep in mind what sort of traders will be rewarded this expiration.  Let’s just assume our more sophisticated traders are using rather dumb market neutral strategies.  Let’s assume the more naive players have a directional bias.  So, roughly speaking the majority of “smart” trades would have gone on around October 16th.  Let’s assume sometime around 10-15 days into the trades, IF AND ONLY IF, they were profitable, they would have taken them off.  Otherwise, smart money would be looking for those markets to be within a similar price range as we close out those contracts which will expire this week.  At which point those markets will be free to explore new ranges in ways they haven’t previously been able too.  One market near and dear to my heart is the metals market.  If this logic pans out, I could see perhaps one more sucker’s rally before a decent breather.  Time will tell.

General outlook:

As always, this is purely an empirical and a theoretical exercise.  Trading is extremely risky.  If you were to trade, you should only ever do so with money you can afford to lose.  Be well, be safe, and be warm.

• The price of gold can come down really fast.  If you haven’t been long gold past a top before, you are naive.  This is a speculative market.  It’s a small market.  And, when it is time for it to take a break, watch out.  I remember being with a bunch of trader’s in Vegas during a metals run a few years back.  Sometime during day two of our stay the market turned over.  It ruined the visit for a number of new friends.  In short, don’t fall asleep at the wheel.  Just like any other market, this one is prone to sharp corrections.
• We’ve come a long ways.  We are up about 30% since April.
• I’m seeing signs of technical divergence surfacing on the price charts.  I’d go into more detail.  But, in this case, the technique I’m using is not published.  It’s not one I came up with.  But, it’s really not mine to share presently.

I’ll I want to say is be very weary of your long positions.

Even better than some general advice, let’s take a look at some recent history so you can get a feeling for 4th quarter gold prices:

Gold at the end of 2004:

Gold at the end of 2005:

Gold at the end of 2006:

Gold at the end of 2007:

Well, that’s 4 out of 5.  In 2008, gold had started a significant pullback earlier.  It was not up to it’s usual self.  Needless to say, this year’s market is set up for an opportunity here.  But, I am definitely not encouraging anyone to be shorting gold at these levels.  Just because the opportunity may be there, it may not be the smartest trade.

It’s Sunday evening and the futures markets are testing Friday’s highs.  I love it.  That’s encouraging for the bears in the neighborhood.  I’d be looking at an opportunity to catch a short on the equities Monday through Wednesday of this week.  Of course, a big part of this observation has to do with the risk/reward.  Although new highs in equities is somewhat hard to imagine, new lows in the Dollar isn’t.  So, as always I’m quite likely wrong.  So, if you find yourself short the market and hitting new highs, get out.  Big picture: this looks like as good a risk reward as you could look for on a trade and the markets are heading towards halfway home… perhaps it’s time for a break.

So, the forecast suggests two interesting timeframes to be looking to get long coffee between now and year end: October 26th and November 19th.  These are highlighted in the chart below.

Now, let’s take that to the chart.

What’s the chart saying?  First off, look at that beautiful coil.  We have definitely penetrated to the upside.  Can we hold it?  Good question.  Only time will tell.  But, look at this historical resistance around 144.25.  If price can hold above there, I’m a believer.  You see my target up towards 160.  There is potential for a solid trade as this price action unfolds.  Just keep the risk reward ratio in mind and don’t be a chasing fool.  Forecasts have to take a back seat to price action.  They are only guides to get our thinking started.  Price action is the authority.  Watch this unfold.  And as always, see the disclaimer.  Futures are high risk.  I am not offering any trading advice and take no responsibility for your actions.  This is strictly for educational purposes.

Because market timing is never something we will know with any great accuracy, it’s important to keep trying and probing.  Even though, I’m much more interested in the downside of a lot of these markets, I’m still actively setting up trades to take advantage of the long side.  As always, every trade, long or short, know your entry, your exit, your target, your risk, and your reward.  Under no uncertain terms, these are all givens.  It’s the research and preparation that goes on before you relay an order to your broker.  There is zero tolerance for improvisation when you have your trading groove on.

So, where is my attention tonight?  How have my thoughts adjusted over the past 24 hours?  Yesterday, I had orders on in Bonds, Cotton, Sugar, Silver, and Crude.  I got zero fills.  No biggie.  It played out as a very orderly “bounce” / range bound day after a monster trend day.  Perfect days for losing lots of money.  I was grateful not to get pulled in.  And, it gave me a chance to look at things again with fresh eyes.  What do my “fresh eyes” see?  Two things primarily: #1) I’m less interested / concerned with equities, bonds, metals, dollar…. more small moves ahead… worth waiting for the story to develop further before taking key positions.  #2) It brought a little more personal interest towards the bullish scenario.  So, I personally will be looking for both long and short side on some of my key remaining markets.  But, again, I’m putting some of the gunpowder back in the shed.

There are two things that should be blatantly obvious from looking at history.  First, 30 year treasury bonds have tended, over the past 30 years, to go up in price (in quite jagged price swings).  Secondly, price is currently exploring the lower boundaries of what historically has served as a pretty important guide for lower value. 

What does that translate to?  Expect upward pressure in 30 year bonds.  I can always be wrong.  And, I know at exactly what price levels to start reevaluating.  But, until price takes out those levels, I’m bullish bonds.  There is a very interesting, possibly longer term, move setting up.

As always, this is not trading advice.  This is market analysis.  You trade your own money at your own risk.  Please see the disclaimer on the side bar.  And, get ready, this is going to be a really interesting few weeks.

With the markets generally accepted as being overvalued and the economy widely accepted as being in the toilet, it’s hard to feel too bullish about price action going into the last week of the month.

What topics and themes are likely to emerge?  Let’s work backwards from next week.  Next week will end with the G20 meetings kicking off, unemployment rate / non-farm payroll, AND and FOMC statement…. not to mention some manufacturing numbers and some pending home sale data.  So, next week is a rocking news week in the financial markets.  We are about to commence “the week before next week.”  This week includes:

• Tuesday’s Consumer Confidence report
• Wednesday’s New Home Sales and Durable Goods Orders
• Also noteworthy on Wednesday is New Zealand’s rate statement

In term’s of the general market outlooks… my bias’ going into the start of the week are:

Favorite set-ups on the horizon:

• Very interested in an opportunity to short metals on the immediate horizon
• Possibility of a short Aussie near-term
• longer term horizon looking at a possibility to short some sugar next month
• An opportunity to buy some indices next month

General observation about markets, cycles, and timing:

As bleak as the current state of the economy and globe may be: as bad as housing may be, as bad as emerging markets may be, as bad as finance industry may be, and as bad as things may be for the US consumer, I would not be shocked if price bubbles continue to melt up significantly before they prices are annihilated again.  It’s well past time many traders expected prices to be heading south.  But, as markets tend to humble their participants, it would not surprise me if they have a few more surprises in store.  I’m just not seeing the technical signs in the market that things are too overdone.  But, the very first technical sign of systemic imbalance is in place: grossly correlated overvaluation across a broad set of asset classes.  But, that’s about it… some meltdown’s come unannounced, but, most don’t.  So, as always, precede with extreme caution.  Keep your powder dry.  Only fire when you must.  And, all the traders I have the pleasure of knowing good trading this week.

Here is the forecast:

The forecast suggests we should be on the look out for:

• a major top around January 24th
• a major bottom around March 26th
• a major top around  May 7th

The next chart is what actually happened this year:

The actual chart shows:

• a high the week of January 30th (in-line with forecast)
• a low on week of March 13th (a week earlier than forecast)
• a high on May 15th (a week later than forecast)

So, the forecast proofs relatively interesting.  The biggest discrepancy comes after the May 15th high.  The forecast indicates the market generally drifting lower.  Yet, prices have been generally drifting higher.  What gives?

First off, it’s just a forecast.  By no means is there any guarantee of accuracy.  But, if there is any faith in the model, what might explain the difference?  Said differently, why might the forecast be “broken”?

Possibly the US Dollar has something to do with it.  As the dollar falls, other assets priced in dollars are rising: equities, energies, metals, and commodities.  Cotton falls into the last category.  Let’s take a look at what was expected of the dollar this year and what actually happened.

The following chart is a simple forecast of the USD for 2009:

Some highlights from the forecast include:

• starts on an uptrend until a major top on February 23rd
• a major high on March 23rd
• a major low on July 25th
• up from their… before rolling a bit later

The next chart is the actual performance of the US Dollar:

The actual performance of the US Dollar shows:

• an uptrend until week of January 23rd (about a month before the forecast)
• a major top on week of March 6th (a couple weeks before the forecast)
• a major bottom on June 6th (a bit more than a month prior to the forecast)
• then the actual price just starts rolling over to new lows…

Perhaps this dollar sinking beyond expectation has something to do with why cotton has been pushed to higher forecasts and the forecast itself is broken?  It’s all conjecture.  But, with the dollar testing lows, and extremely oversold, it’s not a bad time to start thinking long dollar.  Albeit, it may be a bit early for such a trade.  Perhaps in November we will see more convincing follow through in the dollar.  Regardless, if the dollar will rise that will put downward pressure on cotton, which will only reinforce the short position.  Hence, some of my curiosity regarding a the value of a short position in the cotton market.

As always, there is no trading advice offered here.

I’m not going into a lot of detail on this tonight.  But, I can say that the chart is telling me that coffee is looking technically overbought by a number of different statistical measures…. indicated in the bottom of this proprietary chart.  Additionally, I look to see that the longer term trend has no shifted to an up trend.  So, perhaps wait out a pullback and take a shot at a long.  As always, trade with your own discretion.

One market that has my attention at the moment: coffee!  Quite curious?  Read on.

I haven’t done my homework on this.  But, I’ll go as far as saying, the following chart caught my interest:

What you see here is a weekly chart of coffee.  It looks to be breaking out of a bullish wedge.  The bottom chart represents a seasonal pattern for this market.  There is a nice seasonal uptrend on the horizon.  And the wedge itself offers an interesting model for timing.  If this thing were to really break out to the upside, I’d say sometime in the last quarter would make sense just based on what the chart is suggesting.

Keep in mind:  I’m still waiting on that Sugar short to set up… or more interesting is a possible short on the equities market in early November.  I look forward to whatever opportunities lie ahead.