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Politicians have a knack for changing horses in midstream, waffling on policy according to public sentiment. This is not generally looked on as a virtue in politicians, but it’s a necessity for a trader. However good our analysis is, we need to be ready to turn from a bull to a bear ‘in the time it takes for a match to burn,’ as David Bowden puts it.
The grain markets provide an apt illustration of this. When I wrote about Soybeans in the July Platinum newsletter, we had just seen this market break through a double top at the all-time high. This would lead us to believe it was heading much higher. But subsequent action in Soybeans, and also in Corn, has told us that the highs are in place for these markets, at least for the foreseeable future, and the money is to be made on the short side.
The wonderful thing about trading in Commodities is that stellar runs are often followed by stellar falls. (On a side note: If you’re free on the weekend of the 30th and 31st August and can make our Hot Commodities Seminar in Sydney, we will spend some time looking at the grains and the terrific opportunities that these markets are presenting right now.)
What was the first indication that the Soybeans market was reversing? In chart 1 we can see a few reasons that came together.
Chart 1 – The Top in Soybeans
click chart to enlarge
Firstly, we observe that the top of 3rd July came in at 50% of the upward charge that started at the end of May. That range was the same as the range from the 1st April low to the 23rd April top. So we have a range that the market has been honouring, and a failure at the 50% point. That is the most likely place for a change in trend.
Looking at Time by Degrees, the first major top occurred on 3rd April. This top was the 3rd July, 118° degrees from the previous top. Close enough to 120°, one of the triangle points on the Gann Emblem. Already there had been a turn on 1st May, so this was close to a balancing of time – 3rd March to 1st May = 59 days; 1st May to 3rd July = 63 days. Additionally, 3rd July is very close to Time by Degrees off the birth of the contract on 5th October 1936.
On a bigger picture time scale, a 1x1 weekly line from the low of 25th August 1986 called the top in March exactly. This low was the lowest low of a 20-year period, so it was a significant point to draw angles from. This angle is an angle that moves 1c per week. This technique is based on a lesson called ‘Cash and May Soybean Futures’ from the Commodities Course, which David discusses in the Master Forecasting Course. (If you are trying to re-create this example, do it on a weekly chart rather than a daily as I have done here; the date of the low is the week ending 29th August 1986.)
Although the market broke through this angle at the beginning of July, it managed to close above it for only 1 week. It then broke back below it, rallied to it once more, but made a lower top and began to fall again. Gann’s rule is that the safest place to sell is the first lower top, so our rules tell us to go short. If we wanted to do so off this first lower top, our best entry would have been 15th July, going short the openers. This is also a Time by Degrees date for Soybeans.
The market presented an interesting trading opportunity in this run down which is worth commenting on. There was an ABC short trade which showed up on 28th July (another Time by Degrees date). The following day we were filled in the trade, only to be stopped out on the 30th. In such a situation, look at what the market is doing. After a first lower top and a big fall, we would expect further falls. However, after such a big move, we will often see a few days of rally before a resumption of the trend. So don’t give up after you are stopped out; be prepared every day for a second opportunity to get on the trade. If you’re not in a position to watch the market intra-day, you could place an entry order below each day’s low until you are filled. In this case, this would happen on 1st August. You would then need to re-calculate the milestones.
Chart 2 – ABC Short Trade
click chart to enlarge
So what can we expect this market to do next? By the time you read this article the market will already have shown whether I am right or not, but at the date I am writing (10th August) I am looking at support around the 1122 to 1153 level. 1122 is the low of 1st April, while 1153 is the recalculated 100% milestone of the most recent swing. This should occur over the next few days.
At this point we would expect at least a moderate rally. As Gann said, we need to let the market tell its story. But after such a rapid fall the market is probably oversold, and like a rubber band should spring back. We then need to watch to see if it makes it back to the previous high price or makes a lower top. If the latter, we have Gann’s safest place to go short. Based on the position of the market, however, I consider that we have the all-time high in place for the time being, not only in Soybeans, but in Wheat and Corn as well.
Knowledge is power!
Tim Walker
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