A LONG TERM SOYBEAN MEAL TRADE

Now let's consider a longer term trade in Soybean Meal. The approach outlined can help you uncover trades that are big winners over a period of months, not just over the next 15 minutes.

GENERAL DISCUSSION:

It's my habit to look over the weekly and monthly continuation charts of about 20 futures contracts, during the weekend. The markets are closed and I can get an objective, uncluttered viewpoint. I look primarily for Directional Indicators, major D-Levels, and of course! also look at the Trend indicators. In addition to determining the Trend, I look to see if there is acceleration ofprice, or thrust, through any of the DMAs I use, particularly the 25X5. If there is, I take notice. Strong thrust through the 25X5 on a continuation chart, particularly after a quiet period, often signifies a major move is on the way.

CONTEXT:

As I was paging my way through my continuation charts, I saw Chart 15-1 and became really excited. Here's what caught my attention.

Consider the A, B, C expansion depicted in Chart 15-1 and in the accompanying FibNodes printout. The OP move down was fulfilled and therefore indicated potential support, almost exactly where it was when I first observed the chart. The potential support, however, significant as it was, was not strong enough for me to take a position even though the weekly MACD supported a long entry (Chart 15-3). Adequate context for the trade was still lacking. There were no signs of up Movement or up thrust.

I hadn't traded meal since the early 80s. I had all but forgotten it was still traded. When I looked at this chart a little longer, however, I remembered that meal seasonally bottomed at about this time of year (March). With the additional consideration of seasonally, there was enough context for me to want to take a shot at the long side of this market.

TRADE IMPLEMENTATION:

Given the long term nature of the trade, the entry was easy. I would simply enter "at the market" since I didn't need to worry about getting a few cents off the price. Where to place the stop was the problem! There was no sign of support, and the XOP was miles away, so I looked for an alternative approach. While I rarely use option strategies, this was a natural situation to employ one. Here's what I did. I bought the futures contracts "at the market" and bought puts against my position to lock in a maximum loss. I made these trades in the July contract so I would have plenty of time for things to go my way. For those ofyou who may be unfamiliar with option strategies, I'll elaborate. The cost of the put, whose strike price was near the current market price, was essentially the maximum loss I could sustain. That's because the puts gave me the right to sell contracts near the price at which I had bought the futures. If the price went up, I would profit on the futures and cover the puts. If the price went down I would profit on the put options and make up any loss on the long futures position. This type of strategy is called a "beach trade." You put it on and go to the beach!

Shortly after I put on the position, we had a Wash and Rinse and then acceleration of price through the 25X5. See Chart 15-2. The MACD/Stochastic combination shown in Chart 15-3 signaled a buy, so everything was in gear to the up side.

Even if you didn't use the more complex option strategy noted above and you knew nothing about the seasonals, you should have been ready to get on board. Why? Your attention would have been on the Trend indicators, due to the fulfillment of the weekly OP. Then, after the Trend signal, the up thrust, arid the Wash arid Rinse, you would have taken the first opportunity to enter.

Let's look at daily July meal Chart 15-4. We're at the same date as pictured in the weekly chart above. All we've done is reduce the Time Frame to a daily for a more detailed look.

The 3X3 is containing the up thrust, after the acceleration through the 25X5. For clarity, I've shown only a small portion of the 25X5. To segregate your thinking, I strongly recommend you never mix Trend indicators and Fibonacci work on the same chart. I'm breaking this rule in Chart 15-4 however, since the D-Level presentation is simple (only one Focus and Reaction Number) and I want to economize on space.

Where was this first opportunity to enter? Just look at the D-Levels after the acceleration (or thrust) through the 25x5.

Your entry would be just above the .382 Node. Your stop would be under the .618 Node. This is entry technique Minesweeper A, i.e. after the OP support and up thrust manifested on the weekly, you took the first dip to go long. The technique I used was a sophisticated Bonsai entry, using the context mentioned above, as well as that of seasonal support. My money stop was the cost ofthe put options.

Okay, we're long. Now where do we get out? The answer depends on your Time Frame. This could easily be a weekly-based trade as it started out for me. In that case, you would go to a weekly chart, and generate an OP as the wave developed. You could use that OP level as your profit objective. IF you were a daily-based player, you'd go to the daily chart to generate a daily-based OP. The second of these possibilities is pictured by the A, B, C move on the daily Chart 15-5 and shown numerically on the FibNodes printout below the chart.

If we assume our entry was just above the top end of the Confluence area and our stop below the bottom end, we would have been filled and our stop would have remained, untouched. Alternatively, it would have been acceptable to put an initial stop under the primary .618 Node at 16580 and handle any break of Confluence in the manner described under "Advanced_Comments" in the bond Double RePo trade discussed in CHAPTER 12. Now we're in and ready for the next up move.

Below are two Fibnode expansion series: the Fibnode expansion originating from the low at 15980 and the second series originating from the low at 16330. Both are valid. See Chart 15-7 A.

So, what do we do with six profit objectives ?

To simplify the discussion, let's consider the second expansion which is producing lower profit objectives than the first.

We have three profit objectives to choose from. In hindsight, it's obvious the COP would have been the right choice. It would have been my choice before the fact as well. Here's why. Remember I was willing to take the OP profit on the first move up from the 15980 level. For the same reason, I would be conservative and take the COP out of this move. When a market breaks down for weeks and months as Soybean Meal did, it usually has some difficulty initially coming out of the hole, as overhead supply in cash markets comes to bear.

Distant profit objectives are initially difficult to achieve and typically there's a '*'.618 retracement lying somewhere along the line, after the first move up. Later when more traders and commercials realize the true structure of the move, we can be more aggressive in what we are willing to take out of the market and have more confidence in doing so.

Now, let's consider the first expansion indicating COP resistance somewhat higher at 17830. For the same reasons as those just cited, I would take the more conservative COP of the second expansion. There is another reason, as well. Take a look at Chart 15-7B.

After the COP was achieved, and we booked another profit, we finally got to the '*' .618. Primary Node, in the form of a retracement down to 16630. Here's where the puts come off, and long positions can again be established for the OP move to 18410. This OP move is discernible on both daily and weekly charts. Chart 15-8 and the accompanying FibNodes printout shows how you arrive at the Fibnode series, while Chart 15-9 shows the retracement back to 16630, as well as the expansion to 18410.

IMPORTANT POINTS TO NOTE:

Nowhere in this trade am I interested in playing the short side, even though my techniques indicated pretty good places to take a shot at the short side. Why? The percentages aren't there. Remember, we're coming out of the hole, after a major weekly OP, a seasonal low, and thrust through the DMAs. Why fight all that!

ADVANCED COMMENTS:

Trading in hindsight is always easy. Trading decisions based on what you know at the present time are what count. Reconsider the first OP profit objective at 17050, in light of what was shown on Chart 15-7B. The maximum Overbought oscillator up to that point was 315.70. The OP (price) was in that vicinity of overbought when I chose to take a profit. In hindsight, the market went to roughly double that value, but I didn't know that it would, even though the context for the trade suggested that it might. Once the previous oscillator value was achieved, I had an additional reason for getting long this market by using "Special Applications of the Detrended Oscillator" Strategy 5, in CHAPTER 7.

Later in this example, I was willing to take the COP out at 17614. I was looking at the new overbought extreme of 618.90, not the old value of 315.70!

Note that my second trade entry just above the top end of Confluence at 16950 was very close to my initial exit at the 170 area. //; hindsight, I might as well have stayed in! We don't have the advantage of hindsight, however, when we trade.

The reentry at 16950 was a much safer trade than staying with the position at the 170 area because of all the reasons cited above.

In trading based on technical analysis, you are concerned with percentages, with the likely Movement of price, not the value of the price itself. Buying a dip at 500 after a consolidation may be better than buying a peak at 400 after thrust, because it's safer! Don't make it hard on yourself. Play the percentages and whistle all the way to the bank.

WAS A MISTAKE MADE?

Even though this was planned as a long term trade that I expected to last for months, I traded it on a daily basis. I took advantage of daily swings. Was this a Mistake? No, I don't think so. This market was easy to read and ready "for the pickin's." While I was actively trading other intraday markets, there was nothing so captivating that I couldn't take the time to focus on my old friend, meal, for a few minutes each day.

MORE EASY PICKIN'S:

Note: Do you see the Bread & Butter trade represented by the initial thrust up on Chart 15-7A(3X3 not shown)?

Note: The move down from the COP was fast and furious. It looked as though a Double RePo (sell) was apparent. The time between the first and second penetration bars, however, wasjust too wide to qualify and a Look-Alike wasn't enough to motivate me to sell this market, in light of all the positive factors.