XLE Looks Positive - Update 4

XLE Daily

Yesterday I said "If we close above the 8ema tomorrow, then it will look even more like a bobble between MA's." Well, we closed today above 8ema, and about half way up yesterday's candle. So now I expect we'll bobble between the 50sma, which is coincident with the downward Trend Line, and the 8ema, until we break out one way or the other.

If you look at this chart from the swing low at 68.66 forward, then you'll see the downward trending channel we're in, combined with the upward trending channel that precedes it, form a Flag pattern. The expected breakout from the downward channel is to the upside, which would continue the general uptrend you'd see on a higher Time Frame.

The fact that we bounced off the .382 Fibonacci also suggests we're going higher. But trading is a probabilistic enterprise, not a deterministic one, so we'll read the tea leaves the best we can, and remember risk control and capital preservation are the top priorities.

Bullish Jan 2023 Beans - Update 3

Jan Soybeans Daily

Today's candle combined with yesterday's form a Bullish signal called a Bullish Harami. But to be a confirmed signal needs to close over the 8ema, which it didn't.

If you consider the down angled congestion as a Flag Pattern then we have come back down and bounced off it. This is a very Bullish pattern if it follows through.

So, based on these promising, albeit premature, indications, and the fixed risk, thanks to our Vertical Option Spread, led me to leave the position on over the weekend.

Bullish Jan 2023 Beans

Jan 2023 Soybeans Daily Chart

Went long January Soybeans with a Jan 1450/1460 Call Spread for 5 1/8. Multiplier is $50/pt, so cost was 5 1/8 * $50/pt = $256.25. Today's bean close was 1459 1/2, which means our Call spread is very close to 100% intrinsic value. If the futures price stays over 1460, we'll see the valuation of the option spread widen out from 5 1/8 to 10, which would double our investment. It'll widen out because the time value of the long option will wane as we get closer to expiration on 12/23/2022.

See the yellow annotations on the chart above.

Went long because I see:

• Flag pattern break out.
• Scoop pattern about to break out.
• Bollinger Band/Keltner Channel squeeze about to break out.
• Left/Right Combo candlestick pattern.
• Close above the 8ema, with continuation today.
• High up volume.
• Above all Moving Averages.
• No Grain Reports for at least 1 week.

Soon as the order was filled, which was 14:18 ET, 2 minutes before the grain futures market closed, I entered a sell order for 9 3/4.

The expected bullish move of the Jan Soybean futures price is the D point of the AB=CD pattern (see thick yellow angled lines). D can be calculated from 1406.75 + (1469 - 1366.75) = 1509. This is very close to, but just shy of, the previous swing high of 1512.25.

Summary:

Entry: 1459.

Target: 1509.

Stop: not necessary because our risk is fixed and affordable, thanks to the option spread.

Risk: 256.25

Reward: (9 3/4 - 5 1/8) * 50 = 231.25

R:R = 1:1 which doesn't sound great but expect this a high probability setup.

Soybeans and Butterflies - Update 1

Interesting day on the hourly chart. We made a higher low with the 8/5/21 4am - 5am ET candle. Then we got a nice acceleration to the upside, forming a new swing high, followed by a retracement channel forming a Bullish Flag formation. Finally, we closed right on the 8ema at 1328 1/2.

This is bullish price action, which is encouraging. Of course, we could drop hard overnight. If you look from a higher time frame, this whole upward trend, since the D2 point, could look like a Bearish Flag formation.

Stochastics started downward during the end of day profit taking. This could be interpreted as making room for more upside, or as the beginning of the end of this uptrend.

So the best strategy seems to be holding our position but moving the Stop up to break even (1318).

Wheat Might Make Some Bread - Exit

Wheat got burned today. The 639 Stop was not changed since we entered this trade and it was hit today. It was placed just under the previous swing low, which was 639 1/2. We sold at 638 1/4.

We still have our hedge on, which is a ZW July 660 Put, and it did its job as expected. It protected further losses in both Wheat and our parallel long Corn trade. I considered taking off our Stop since we have a hedge, but decided to let the Stop work because it was unlikely to be hit and we're on the July contract, which expires July 14th. Contracts have already rolled to the Sep. contract.

To continue following this trade, please follow the Corn trade beginning with "July Corn Rising - Update 12". 

Summary, NOT INCLUDING THE HEDGE:

YW Exit 638 1/4 - Entry 693 1/2 = -55 1/4 * $10/pt = $-552.50 "Loss". We won't know the bottom line of this trade until we know how we exited the hedge and the corn contracts.

July Corn Rising - Update 11

Above is a zoomed in view of the daily July Corn chart. We closed with a Doji, just below the 8ema but above the Flag pattern Trend Line. We are in a somewhat neutral situation and therefore still in need of protection.

We had sold off the hedge this morning when Corn was looking strong and appearing to break out of the Flag pattern, again. If we get follow through to the upside and a higher high than the previous swing high at 717 1/2, then this is a very Bullish pattern. But at the moment, there isn't a clear direction.

So, we bought back the July Wheat 660 Put hedge for 13 points.

For more details on this, please see today's post on the parallel Wheat trade:

https://jmstweets.blogspot.com/2021/06/wheat-might-make-some-bread-update-11.html

A good lesson here is the importance of waiting until a candle closes to have a valid interpretation of its signal. This is true on any time-frame. However, there are situations where you already have a strong indication from the previous candle, and you'll need to make a trading decision based on how the next candle begins.

Wheat Might Make Some Bread - Update 11

We started the day session with a strong Bullish move up to the 8ema. As I mentioned in yesterday's post, the July Wheat Futures 660 Put Option hedge we bought yesterday for 15 1/8 would lose value quickly if price starts rising because of the size of the hedge and its proximity to expiration. So, given the strong upward move combined with a fast rate of change in the hedge, I sent the following Tweet at 10:03am ET:

"Seeing some strength in July Wheat and Corn so sold the hedge."

Sold it for 12 points, so the loss was (12 - 15 1/8) * $50/pt = -$156.25.

This decision seemed to be a good one as the futures price continued to rise. But it topped out at 11:51am ET at 672.75 which is both the 8ema on the Daily chart as well as the swing high on 2/24/21, which can serve as resistance. It was marked on our chart. See the then white horizontal line.

By the end of the trading day, price had retraced almost exactly to the open, thereby forming a Doji candle. We were at the middle of the Flag pattern channel, with mid-range Stochastics, and a Doji indecision candle. Where we go from here is a crap shoot.

So, in response I sent the following Tweet just before the close:

"Bought the Wheat hedge back."

This time we got the hedge for 13 points x $50/pt = $650.

By the way, July Corn closed with a Doji, just below the 8ema but above the Flag pattern Trend Line. Stronger position than July Wheat but still in need of protection.

Wheat Might Make Some Bread - Update 10

This time its different. Meaning today's candle went all the way down to the bottom Trend Line and closed far from the 8ema. The past 5 days were more neutral, but today is clearly Bearish. So now, I have to do something about it. Either exit the trade or find a way to hedge it.

The thing is, we could be about ready to break out of this Bullish Flag pattern to the upside. The BB/KC Squeeze is still working and we have no sign of breaking out of that yet, but when we do, we can see a large move. If we break to the downside, we'll definitely hit our Stop which would be a sizable loss. The Entry is 693 1/2 and the Stop is 639. So the loss would be (693.5-639)*$10/pt=$545, plus a similar loss on our parallel corn trade.

There are a number of different ways to take a hedge on this trade, including buying a Put Option or Put Option Spread, sell a Call Option or Call Option Spread, short another grain futures such as Soybeans, or use an appropriate ETF. I decided on buying a July Wheat Futures 660 Put Option for 15 1/8 points with an expiration date of 6/25/2021. The option is on a full size ZW Futures contract ($50/pt) not the YC mini ($10/pt). The cost was 15.125*$50=$756.25 with a Delta of .514.

Since the option underlying futures contract is 5x our long futures contract and the Delta is about 50%, we should see an increase in the value of the option that's 2.5% the change in the Wheat futures. Plus the Delta will increase if the futures continue downward. So, this one option should cover both our Wheat and Corn contracts.

Now there's the question of whether to take off the Stop on our futures contract since we're theoretically covered by the option contract. I think if we come down as far as the Stop, then we're in serious trouble. Since the advantage of holding the futures through the Stop level would be that we don't need to decide where to re-enter the trade and most likely lose some possible profit by waiting for a good buy signal. We also would save on commissions, but they are negligible on this trade.

So given that, plus the fact this futures contract will expire on July 14th, and we need to roll forward to the September contract anyway, I decided to leave the Stop on.

It will be important to liquidate our hedge quickly if sentiment turns around. Because of the size of the hedge and its proximity to expiration, it would lose value quickly.

I try to stay away from fundamentals because there is so much bad information and manipulation out there, but I wanted to include the reason for the deviation of our bullish trajectory at the beginning of this trade is due to a change in the weather forecast for the new September crop in the USA.

July Corn Rising - Update 9

The past 2 trading days formed a Bearish Engulfing candlestick pattern and today's price action provides confirmation we're going lower. My trading style clearly would have me exit this trade then watch it for a possible re-entry long.

However, we found support on the 34ema, and have further support from the 50sma below us as well as the bottom Flag Trend Line and previous support/resistance level at 635. And we have to give consideration that this price action may be a retest of the top Flag Trend Line that overshot the top of the Flag somewhat.

We're also about 75% the way into a Bullish Fry Pan Bottom pattern (its a version of a cup formation). If we recover and the Fry Pan Bottom pattern completes and breaks out we'll have a very strong upward move.

I may have gone off the reservation here, but I think it's worth suspending the rules to give this trade a chance to prove itself.

Wheat Might Make Some Bread - Update 9

Big dip today, but still inside the Bullish Flag candlestick pattern. Notice there was enough buying before the close to get near the 8ema. Also notice the Bollinger Bands are inside the Keltner Channel and Stochastics are mid-range. 

The above observations convinced me to disobey my usual trading style and not sell the position. Being in a messy consolidation, with a Bullish Flag and BB/KC Squeeze forming, suggests I should give less weight to the candlestick analysis, and we'll be getting a breakout soon. So, we want to give this chart wider than usual leeway. 

The counter-argument is that this contract expires on July 14th and the July contract no longer has the highest Open Interest. This could mean we may not break out of this consolidation before expiration. Also, I should consider the possible influence of an emotional resistance to taking a loss if we exited today.

The roll forward from the July contract may be the cause of the less than Bullish price action the past few trading days.

Well, I made my decision and we'll see what happens.

Wheat Might Make Some Bread - Update 7

I wanted to dump this lazy, depressing, Eeyore of a commodity all day.

Corn has had 2 green happy up days while Wheat has dipped threateningly in the morning then climbs to barely close on or just over the 8ema. Today we formed a Doji candle, which represents indecision.

Since we closed over the 8ema, its not appropriate to exit this trade. So we held the position, but I have repeating visions of the bottom falling out of it. 

However, the probabilities of a Bull Flag is to break out of it to the upside. And inflation and Corn support that outcome. But Soybeans looks Bearish. In fact, if I was long Soybeans, I would have closed out of it today. 

Mixed charts among the grains creates doubt in a grain trade. But you have to trade the instrument you're trading. I wouldn't close Wheat because Soybeans look bearish for example, although I may regret not doing so over the next few trading days.

July Corn Rising - Update 7

Had a very nice Bullish day. Closed above the 8ema and right on the 3ema, after bouncing off the upper Bollinger Band and Keltner Channel. Looks like we decidedly broke out of the Flag pattern.

It would not be unusual to come back down temporarily to test the top Trend Line of the Flag, but I would prefer if we didn't.

Stochastics are just touching the 80% line. If we have another up day tomorrow, we'll probably cross into the overbought area.

I'd love to move up our Stop to break even but we're still too close to do that.

July Corn Rising - Update 6

We initially took a dip deeper into the Flag pattern consolidation, but we reversed and closed above the 8ema, the upper Trend Line, and near the highs of the day. Stochastics are still not overbought, which is nice. 

We still need to make a new high that is higher than the swing high 2 days ago before I'll feel on track with this trade, but we're certainly looking better today than we did the last 2 days.

Of course, we held the position.

Wheat Might Make Some Bread - Update 6

Not the most reassuring Close, but we did manage to not close below the 8ema. We're still in the consolidation of the Flag pattern, but our Corn trade, which is happening in parallel to this trade, closed above the Flag.

So, we held the position.

Wheat Might Make Some Bread - Update 5

Today's price action could be a bad thing or a blessing in disguise. Could be bad because we dipped back rather deeply into the Flag consolidation, and could continue downward in the next session. Could be a blessing because we're filling the gap right away, so we don't need to worry about the gap "attracting" price to fill it in before we reach our target.

Our Bullish long trade hasn't been invalidated by today's big red candle. We did not close below the 8ema or below the lower Trend Line of the Flag. Its more likely its profit taking on a gap up rather than a trend reversal. However, we did form a Dark Cloud candlestick pattern, which is Bearish, but we haven't closed below the 8ema. We've been forming alternating Bullish and Bearish candlestick patterns since the recent swing low on 5/26/21.

• Bullish Engulfing
• Bearish Harami
• Bearish Harami
• Bullish Harami
• Dark Cloud (bearish)

Given the alternating nature, the price consolidation we're in, and mid-range Stochastics, I think we have to give little weight to the candlestick patterns for now.

While its disturbing to fall back into the consolidation after gapping up and breaking through the upper Trend Line, we still have a predominantly Bullish setup. So we need to hold the position, and perhaps tomorrow will be a Turn-around Tuesday.

July Corn Rising - Update 3

Once again, the July Corn and July Wheat Futures are so similar my comments are the same. Just ignore the comments on the candlestick pattern on the Wheat chart, which does not apply to the Corn chart.

Unfortunately, we did not form a Bullish candlestick pattern today, other than bouncing off the 8ema, closing above the 8ema, having a positive day, and closing near the top of today's trading range.

Please see https://jmstweets.blogspot.com/2021/06/wheat-might-make-some-bread-update-3.html

Wheat Might Make Some Bread - Update 3

In trading, patience often pays off. As much as I wanted to exit this trade yesterday, I clenched my teeth and held, for the reasons I discussed in the previous post. Today I was glad I did.

We bounced off the 8ema and 50sma and closed above both. At the close, we formed a Bullish Harami candlestick pattern. Although, we also just formed a Bearish pattern as of the Close yesterday. So while we're moving sideways on mid-range stochastics we probably shouldn't give much weight to these candle patterns. But still, its reassuring to get a Bullish pattern.

Also, we seem to be forming a Bullish Flag formation. See the 2 thin white downward angled line segments. If we are, it would be relatively short in length to break out of a Flag pattern on the next trading day. So if we're in a Flag pattern and we have a few more days to complete it, then we may make some more lower lows.

Today's price action is definitely telling us to stay in this trade. But today is a Friday which means we have to sit out 2 calendar days, and we may get a few more down days next week. So it makes sense to take some kind of hedge. To that end, I got a ZC corn futures Jul 600 Put option for 3 1/4. The cost is 3 1/4 * $50/pt = $162.50. Our Stop on our long corn trade is 602. But Stops don't work when the market is closed. In this situation you want an option. Since we were willing to use a Stop at 602, the option Strike can be just under that to handle a catastrophic drop in price.

Why corn? Well, we also have a long position in corn as well as this long position in wheat. In both trades we're using the mini-contract, which is $10/pt rather than $50/pt for the full contract. Since the price action on corn and wheat have been extremely similar from the beginning of this trade, and since the value per point is 5x larger for the option than the mini futures contract, I figured the one option for corn will also give us a hedge against a severe drop in wheat.

Possible Apple Drop - Update 3

Interesting day. We gapped down at the open right at the bottom of the open gap 124.26 - 123.06. That was great, but we spent the day filling in the original gap, then also filled in the rest of the gap we formed  at today's open. In so doing, we watched about $100 of value in our Put option dissipate.

Looking at it on the hourly chart above we see we formed a flag. I was very tempted to take the $150 profit that was left in the trade at the end of the day. But, even though we closed over the 8ema, we're still under the downward angled Trend Line, under the 200sma, 50sma, and 20sma. Since we filled the gaps and we're close to resistance, there's a good probability we'll resume the down trend tomorrow.

However, the past few Thursdays have had strong bullish moves. We could break out to the upside and just keep going. And the bottom of the channel could certainly provide support.

We could also bobble around between the 8ema, upward Trend Line, and the top of the gap providing support, and the downward Trend Line, 50sma, and 20sma overhead providing resistance, until we break out one way or the other.

It was a difficult choice, but we stayed in the position. We'll see what happens tomorrow.