Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading_9

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Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading_9 TopThe dominant pattern in this market remains the seven-month double top on the weekly graph (see Figure 9.1). Adecisive close below 1.5600 would complete this formationand establish an objective of 1.440, with a further possibilityof reaching the 2009 low at 1.3500. I feel certain that thiswill be a Best Dressed move in 2010—the question iswhether my trading rules will be in sync with the decline.FIGURE 9.1 Possible Eight-Month Double Top inGBP/USD. S&P 500: A Breakout of the Channel Is Coming SoonThe U.S. stock market has experienced a near-historic bullrun from the March 2009 low. There are some signs that themarket rally is getting short of breath. As shown in Figure9.2, the market exhibits a six-month channel. Prices havebeen unable to test the upper range of this channel, a signthat momentum is being lost.FIGURE 9.2 Six-Month Channel and Three-Month Wedgein S&Ps. Most recently, the market is coiling into a two-monthrising wedge, a bearish pattern. The rising wedge ischaracteristic of a countertrend rally. The targets for thismarket, pending a downside breakout, are 1030, then 980. 30-Year T-Bonds: A Bear Market in the Making in Every Time FrameHow do you spell sovereign default? The longer-termcharts in the U.S. T-bond market look like a catastrophewaiting to happen. Three charts are presented. First, inFigure 9.3, the quarterly chart dating back to the early1980s displays a trading channel. At some point, thischannel will be violated and prices should then movedownward an amount equal to the width of the channel. Theprobable target would be a test of the 1994 lows at around80.FIGURE 9.3 Multidecade Channel in T-Bonds. Figure 9.4 is a weekly continuation chart of the bonds.This chart displays a 29-month H&S pattern. As this patternunfolds, prices move closer and closer to the lowerboundary of the dominant quarterly chart channel. At thistime, the right shoulder appears to lack symmetry with theleft shoulder. The right shoulder would be of equal length tothe left shoulder in March or April 2010. I anticipate a top inlate March.FIGURE 9.4 Two-Year H&S Top on the Weekly T-BondChart. F inally, Figure 9.5 shows that the right shoulder of theweekly H&S top could itself be a possible complex H&Spattern on the daily chart. All that is needed is a rightshoulder rally not to exceed 121 followed by the penetrationof the neckline.FIGURE 9.5 Possible Six-Month H&S Top on the Daily T-Bond Chart. This market is set up for cascading chart events. TheH&S on the daily chart could launch the H&S on the weeklychart, which could launch the completion of the channel onthe quarterly chart. T-bonds, in my opinion, offer the bestopportunity to make $25,000 to $30,000 per contractduring the next two years. But timing is everything. If atrader is right on direction, but wrong on timing, then thetrader is wrong period. Gold: The Bull Market Has Room to GoA version of Figure 9.6 is displayed in figure 6.10 inchapter six. The advance in October 2009 completed aninverted H&S bottom pattern on the weekly and monthlygold charts. This pattern has an unmet objective of 1350.FIGURE 9.6 Inverted Continuation H&S Bottom Pattern inGold. Sugar: Quarterly Chart Indicates 60 CentsSugar is a wild market that can and will surprise thesmartest of traders. This boom-to-bust market epitomizesthe term popcorn rally. While the bull market in sugar as ofthis writing (January 5, 2010) could end when leastexpected, the longest-term charts indicate that Sugar hasthe potential for 60 cents. The monthly graph in Figure 9.7shows the entire period from 1981 through 2009 as a basearea. If this is the case, sugar could easily make new all-time record high prices.FIGURE 9.7 28-Year Base on the Monthly Sugar Chart. Dow Jones Industrials: A Multigenerational Top in the Making?This is my “pie-in-the-sky” chart. While quarterly and annualcharts are not practical for tactical trading decisions, theydo make good fun in creating crazy price predictions.Figure 9.8 is a semilog quarterly chart of the DowFIGURE 9.8 A Possible 12-Year Top in the DJIA. going back decades. I can’t help but notice the possibleH&S top. If this interpretation is correct, the market ispresently in the right shoulder rally. Symmetry would beachieved by a rally in the Dow Jones Industrial Average(DJIA) to around 11,750 with a right shoulder highsometime in 2013, plus or minus a year. At Dow 11,500, Iwould not want to own a single stock. This chart is beingpresented just for fun—for now. Amending the PlanAfter some serious soul searching over fourth quarter 2009trading activity and performance, I am making a strategictweak in the Factor Trading Plan. The change deals ...