Investing Daily

This has been a year full of volatility and incongruities in the commodity markets. But there’s an upside: I’ve learned to respect both the volatility and incongruities. In fact, all traders can learn quite a bit from what’s transpired over the past few months.

 

Consider the following:

A trader must respect a market that’s not doing what it’s supposed to be doing. Remember the severe late spring Midwest flooding? This began in early June and carried into the middle of the month. The talk at that time was that the flooding had devastated the corn crop, knocking out at least 4 million acres in Iowa alone.

However, just as the news became the most bullish, the corn market was actually topping out. Despite what everyone heard and believed about the devastated crop--and the inevitable higher prices--we had to respect the market action. When the corn futures broke down in early July, this was the nail in the coffin. As evidenced on the chart below, the market was clearly telling us the path of least resistance at that time was south.

December Corn (April to August 2008)

 

Source: Commodity.com

Around the same time, the soybean market was carving out a bearish chart pattern termed a traditional “head and shoulders” top. This was confirmed by the breakdown from the neckline as evidenced on the following chart. Believe me; the news was extremely bullish at the time.

The government had told us the carryover supply for soybeans this year was going to be close to the smallest in history. Despite this, the H&S pattern projected a minimum downside target of $13.45 per bushel when the market was trading at $14.90. I certainly didn’t want to top pick a market with such bullish fundamentals, but I should have respected the message the market was giving us. Not only was the minimum downside objective met, it was greatly exceeded as the following chart illustrates.

November Soybeans (April to August 2008)

 

Source: Commodity.com

In August the corn market performed another incongruous action--this time right at the bottom. There was a very bearish crop report released early Aug. 11. Basically, the government dismissed any yield loss from that flooding that occurred just a few months earlier. The corn market opened lower but was able to close higher that day, and it continued to rally over the coming weeks.

December Corn

Source: Commodity.com

So the lesson we can take away from all this is to respect what the market tells us, listen to it and ignore the nonsense in the news. More recent incongruous market action should be respected because it may be indicating something important.

Below is a weekly chart of the US Dollar Index for the past few years. We’ve been told the dollar will continue to depreciate because of myriad factors such as the deficit, the credit and bank crises and the weakening economy. But something interesting took place on the chart about a month ago. The dollar broke out to the upside. In essence, the corn chart above turned upside down. There weren’t many corn bears at the top of that chart, and there aren’t many dollar bulls today, but the market action (as illustrated in the chart below) should be respected if we’ve learned anything this year.

Weekly Dollar Index (2006 to Present)

 

Source: Commodity.com

Next on our agenda is the case for gold, which tends to move inversely to the dollar. In other words, when the dollar is weak the gold market strengthens, and visa versa. In 2000-01, the dollar generally moved up, and gold generally moved down. Then in 2002-04, the dollar generally trended down as gold climbed. This has been the same case the last few years; in 2006-07 the dollar generally trended down as gold prices rose.

Therefore, with the dollar trending up over the past few weeks, we’d expect gold to start trending down. However, take a look at the weekly gold chart below.

Weekly Gold (2006 to Present)

 

Source: Commodity.com

Despite the fact that the dollar has been in a definite uptrend over the past month, gold has also been moving up over the past few weeks.

Is this possible? Sure, it’s possible and not unprecedented. Although, consider the dollar/gold trend in 2005. The dollar began that year at 81 and ended the year at 91. Gold began that year at 420 and ended the year at 520, so it’s certainly possible for the dollar and gold to move in the same direction.

I’d consider this current incongruity something we should consider as a possible trade. Over the coming weeks, my plan is to determine a reasonable point to re-enter the gold--and possibly the silver--market for my Futures Market Forecaster subscribers.

One of the keys to success is to find and exploit those incongruities.

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Risk Disclaimer
Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.