Special Report, Buy Soybeans & Sell Corn: 04.13.2011

Why I am SUPER Bullish on the Soybeans/Corn Spread

Long before I became a chartist (and ever since) I have followed the fundamental data on corn and soybeans. In fact, in my early days at the Chicago Board of Trade I focused on these two commodities for three years.

It is often a mistake for a technician to dabble in fundaments, but that is exactly what I have undertaken. And based on this undertaking, my conclusion is that anybody committed to the short side of soybeans for the next 12 to 18 months will get massacred. Do NOT become married to the short side of soybeans.

Here are my fundamental reasons:

  • Corn supplies are extremely tight. Ending U.S. corn stocks are projected to be 675 million bushels. That is equal to 5% of consumption, or 18 days worth of supplies. An 18 day supply barely fills the pipeline. (Source: USDA Global Report, April 8, 2011.) It is the role of price to ration supply. Prices will need to remain strong or go higher to curb demand for U.S. corn.
  • High corn prices have not curbed demand. Usage remains strong despite record prices. (Ibid.)
  • Soybeans prices (old crop) are at their cheapest level ever against corn prices. It is not unreasonable to expect 2011 planted acreage in the U.S. to move from soybeans to corn given the current price ratio.

I am including a number of charts and graphs to make my case. The first chart shows U.S. corn carryout as a percent of production. Ending corn stocks as a percent of consumption have been near the current projected levels only a few times in history.

 

 The next chart shows how corn prices behaved in the years of short ending stocks.

The next chart shows the soybean/corn ratio dating back to the late 1960s. Historically, soybeans are considered cheap to corn whenever the bean/corn ratio is below 2.0. Currently the old crop bean/corn ratio is 1.76 to 1. This is a record cheap level.

Historically, acreage moves from soybeans to corn whenever the bean/corn ratio is below 2.0. The next table shows what happens in the 12 to 24 months following low bean/corn ratios. Note the substantial advance in the ratio following periods of low ratios.

 I am a technical chart trader. However, I believe that in the next 12 to 24 months the bean/corn ratio will advance to a minimum of 2.8 to 1. Presently the new crop ratio is 2.1 to 1. The way to trade the ratio is to sell two bushels of corn for every one bushel of beans purchased.

Technical traders should monitor the corn and beans separately, looking for buy signals in the beans that are not confirmed by corn. View such situations as an opportunity to buy the bean/corn spread. Trend followers could also follow the daily chart of the bean/corn spread.

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Appless Computer – Part 4: 04.12.2011

Apple is declining into support.

The poisonous wrath from the Apple Computer “fruit and nut club” continue to come my way. Here are just a couple of excerpts from the “fan” mail I have received because I suggested that AAPL might be topping out.

  • “This is nonsense. Never heard of a double head. This is a bullish flag, which means the upside will be equal to its previous rising leg. STOP giving false forecast.” (Emphasis not mine.)
  • “Charting[is] so 90…Hello High Freq Trading.”

I do not find these comments offensive or even irritating. I only bring them up because of the humor involved.

“Never heard of a double head.” OK, start with Edwards and Magee, 5th edition, pages 68, 69 and 76 for starters. A double head is not my invention.

“Charting [is] so 90s.” Well, with this in mind let me comment on the chart of AAPL.

The decline on Monday (the 10th down day in 11 days — not exactly a show of strength) has brought prices closer to the critical neckline of the 3-month H&S top. It is show time! The market is NOT oversold, yet I must emphasize that AAPL has NOT completed a top and until it does the trend must be viewed as being UP, not down. The neckline at around 224.50 (+/- 2) will be a magnet for prices.

A decisive close below 320.50 will be the kiss of death for AAPL, and will set up a target of 280 to 285. But if the market can hold above 320, turn back up, spend a full day above the neckline and then advance over 342, a major chart buy signal will set up. Until then I assume that the H&S top will become a reality.

I am short. I have moved stops to 335.81 and 340.27. My risk is presently about 38 basis points. I plan to cover some shorts today if the market opens lower and holds. I would then put the shorts back on if a rally develops. But, if the market opens lower and cannot fill the subsequent gap in the days ahead, my advice to Isaac Newton is… “Duck!”

BTW, there is an upside gap on the chart at 323.48 from Dec. 31. The market may be attempting to fill this gap. Or, the market may gap below the neckline and form an “area island top”….which, of course, like the double head, is also a chart formation I am just making up.

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AAPL Part 3, It’s All About Risk: 04.11.2011

It has nothing to do with Apple as a company!

This is my third blog posting about Apple Computer in the past week. The first post suggested strongly a possible top in AAPL. The second post detailed a three-part shorting strategy for AAPL. I executed the first two parts of that shorting strategy last week.

I have received hate email for even suggesting that Apple’s stock is subject to a sizable correction.  It has been as if I touched the third rail. People have pointed out to me that no bearish analysis should even be considered. I have heard all about the pending changes in accounting procedures for the iPhone…about low forward P/E ratios…about the sales potential in China and Asia…etc.

To my critics I would just say this: “Get a life…I mean no personal insult…I could care less if AAPL goes up or down in price.”

When I see a great signal set up on a chart, I could care less what company it is or what its fundamentals are. In fact, I could care less if I will be right or wrong in the trade — in truth, I assume I will be wrong (I am wrong about 65% of the time). The only important thing to me is the risk/reward profile of the trade.

I shorted 100 shares last week at 338, anticipating a 3-month H&S top. I shorted another 100 shares at 334.38 when a small flag was completed.  If the H&S top is completed I will short more AAPL. My protective stops are at 336.19 and 340.51. I am risking 61 basis points on the trade currently. That is 6/10th of 1%, or $600 of each $100,000. I have the potential to make 1400 basis points on the trade, that is a 14% gain on a single trade.

Successful market operations have little to do with correctly picking the direction of a stock — and everything to do with managing the relationship between risk and reward. I will take trades with a 20 to 1 risk/reward relationship any day of the week. I could care less if the trade is in AAPL, or Gold or tapioca futures.

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AAPL Part 2 – How to build a fabulous risk/reward trade: 04.08.2011

The Apple is falling — time for the harvest?

I am a trader, not an analyst. Actually, being an analyst is a much harder job. An analyst is pressured to be right. As a trader, I assume I will be wrong 65% of the time. So my job is to find trades with a great risk and reward profile.

Apple Computer is a great real-time, right-now example of how I approach a trade. I believe that AAPL is building a classic H&S top. If this top works, the AAPL chart will be in the textbooks 50 years from now.

As a trader I want to limit my risk to 75 to 100 basis points per trade (e.g., no more than 1% of capital). So, I want to short Apple and risk no more than $1,000 per $100,000 of trading capital. I always think in terms of units of $100,000.

So, I go short today — 100 shares at 338. My risk is to 345, or a risk of $700 per $100,000. First layer is on.

I will short another 100 shares if the market can penetrate this week’s low and complete a small hourly chart flag. So I have an order to sell stop another 100 shares at 334.40. If I am filled I will risk my entire position to above 340 for a total risk of $750 per $100,000 on the 200 shares.

I will short another 100 shares if the H&S top is completed by a move under 322. I will then protect my entire 300 share position to just above 330. If I fill all three layers and get stopped out, I end up with a small profit.

So the bottom line is this: The most I risk by being a bear on Apple is 75 basis points. But what if I am right in my analysis and timing, and remember, a good trade has to be right on both counts? It is not good enough to be right on one component and wrong on the other.  The H&S target for Apple is 285. If the market breaks out of the H&S top and does not have a deep retest, then travels to the target, I will have a trade that yields $14,200 or so per $100,000. I am risking 75 basis points to make 1420 basis points. That’s a risk of 3/4 of 1% to make 14%. I will take a trade like this every day. In fact, right or wrong on AAPL, this is exactly the type of trade I love to find. In fact, I should stop being a chart trader if I ingore Apple.  As a trader, being right is secondary to making money. Being right is over-rated!

I think this trade has a good shot at doing what I anticipate. The reason is that nobody really thinks Apple can drop. Yet, it has declined nine out of the past 10 trading sessions, the 50 day MA has rolled over and the volume profile of the H&S pattern is absolutely textbook. It has not completed a top yet, but time will tell the story.

The AAPL is swinging in the wind from the branch. I will stand below the tree with a bushel basket.

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The Apple (AAPL) is falling from the tree – Chart Review: 04.06.2011

Is the Apple about to take a fall from the tree?

Summary

There are chart patterns…then there are textbook chart patterns. Presently Apple Computer (AAPL) is forming a head and shoulders top that could go into the textbooks as an example of classical charting principles.

The daily chart of AAPL exhibits a near-perfect example of the H&S pattern. Several aspects of this chart are worthy of note.

  1. The pattern actually has a double head. This adds to the bearish potential of the pattern.
  2. The decline since the March 28 high (the high of the right shoulder) has taken place against the backdrop of new highs in most of the major stock indexes.
  3. The neckline is nearly flat. Horizontal necklines add reliability to a H&S pattern.
  4. The volume profile is straight out the Edwards and Mage (and Schabacker) textbooks. Note the heavy volume on the left shoulder, slightly less volume throughout the head, and finally light volume in the right shoulder, particularly during the mid- to-late March rally. This volume profile is a classic example of price distribution – shares moving from stong hands to weak hands.

It is important to understand that this pattern has NOT yet been completed. This is a chance this pattern could fail to materialize. Chart patterns are most useful as trading tools, not for making price forecasts. Short positions established at current levels could be protected using the March 28 high at 354.32. A decisive close above the existing right shoulder high would largely negate this H&S interpretation.

A close below 320 would complete the H&S top. Is must be remembered that the H&S pattern indicates a change in the primary trend and can carry prices far beyond the measured move. I have included a chart of the H&S bottom for Apple computer completed in 2009 prior to this incredible bull trend.

My game plan is to wait for a breakout and then risk about 150 basis points on a short position, or one and one-half percent of trading capital. The Apple may stay on the tree and ripe some more, but a strong wind could end this apple’s growing season. 

Summary

 

There are chart patterns…then there are textbook chart patterns. Presently Apple Computer (AAPL) is forming a head and shoulders top that could go into the textbooks as an example of classical charting principles.

 

The daily chart of AAPL exhibits a near-perfect example of the H&S pattern. Several aspects of this chart are worthy of note.

 

  1. The pattern actually has a double head. This adds to the bearish potential of the pattern.
  2. The decline since the March 28 high (the high of the right shoulder) has taken place against the backdrop of new highs in most of the major stock indexes.
  3. The neckline is nearly flat. Horizontal necklines add reliability to a H&S pattern.
  4. The volume profile is straight out the Edwards and Mage (and Schabacker) textbooks. Note the heavy volume on the left shoulder, slightly less volume throughout the head, and finally light volume in the right shoulder, particularly during the mid- to-late March rally. This volume profile is a classic example of price distribution – shares moving from stong hands to weak hands.

 

It is important to understand that this pattern has NOT yet been completed. This is a chance this pattern could fail to materialize. Chart patterns are most useful as trading tools, not for making price forecasts. Short positions established at current levels could be protected using the March 28 high at 354.32. A decisive close above the existing right shoulder high would largely negate this H&S interpretation.

 

 

A close below 320 would complete the H&S top. Is must be remembered that the H&S pattern indicates a change in the primary trend and can carry prices far beyond the measured move. I have included a chart of the H&S bottom for Apple computer completed in 2009 prior to this incredible bull trend.

 

 My game plan is to wait for a breakout and then risk about 150 basis points on a short position, or one and one-half percent of trading capital. The Apple may stay on the tree and ripe some more, but a strong wind could end this apple’s growing season.

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Chart review 3.29.2011: $USDJPY

After the “wash-out” decline in mid March, the $USDJPY is performing a classic “end-around” pattern. The move back into the 20-week symmetrical triangle in early trading today (Tuesday, Mar. 29) is confirmation that the “end-around” pattern is the correct chart interpretation.

A classic "end-around" chart formation

The final confirmation of this pattern will be a close above the mid-February high. Support in the interim will be found at the lower boundary line of the original symmetrical triangle, or around 81.60. Longs can be protected at 80.49, so the risk of a long probe would be about 110 pips. The target for an “end-around” at minimum is the width of the triangle projected upwards from the upper boundary. The distance from the Nov. low at 80.24 to the Dec. high at 84.51 is 427 pips. Add 427 to the Feb. 16 high at 83.98 and the target becomes 88.25. Even from current levels of 82.27 the reward/risk profile of a long position is 3.4 to 1. Purchases at the support of 81.60 would have a reward/risk profile of 6.0 to 1.

There is obviously the chance this chart could morph into something else. But for now my best guess is the “end-around” interpretation.

$USDJPY

Special Report 3.25.11: Asian Bull Awake!

The longer-term charts indicate that the Asian and emerging stock markets are poised for a strong advance from current levels. This report focuses on the ETFs for emerging and selected Asian stock markets.

[scribd id=51731137 key=key-1l9eiyudwzra3i0i1g6t mode=list]

$EEM $EPI $EWA $HAO