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Some feel the latest rallies the markets have seen are due to the U.S. economic recovery being stronger than some statistics suggest or they credit the still-unknown effects of an early frost and a late, cool, wet harvest season for the price rally in corn and soybeans. But wheat? Why did wheat futures climb 25 percent in the first few weeks of October? Reports suggest wheat supplies are plentiful around the world, and the winter wheat crop seems to have gotten sown in generally better conditions than in recent years to set up the potential for good yields for the 2010 crop.  Yet, wheat prices have rallied with other commodities after falling below $4.40 a bushel in early October. Intermarket analysis -- the influence of related markets -- probably accounts for some of the bullishness in wheat. But wheat provides an example of how you don't have to know much about fundamentals to capitalize on a trading opportunity using charts. December wheat futures peaked in early June at $7.25 a bushel -- nothing like the record prices in the first quarter of 2008 but still high historically. With spring crops finally getting planted and seasonal harvest pressure, wheat futures then began a long downtrend, interrupted only by a few countertrend rallies (red circles on chart below). If you cannot view the chart, go here. Almost any trend-following technique could have performed well in a downtrend like this. But no market goes down forever, and as wheat prices drifted down toward the $4 a bushel level, it no longer was as good a shorting candidate as it was at $7. It became time to look for a bottom and signs that the market might reverse course or at least go sideways. VantagePoint Intermarket Analysis Software provides several good indicators that can help determine when this possible shift in market mentality might occur. The most prominent clue on the chart below is the moving average crossover when VantagePoint's predicted medium-term moving average (blue line) crosses the actual medium-term moving average (black line). But a couple of other VantagePoint indicators provide an earlier alert that a trend may be ready to change.

If you cannot view the chart, go here. The first indicator is the predicted moving average difference lines in the lower panel of the chart above. The differences compare two moving averages to each other and, as the differences widen or narrow, indicate strengthening or weakening momentum of the price trend. When the predicted medium-term moving average difference (blue line in bottom panel) rises above the predicted long-term moving average difference (green line), it suggests increasing upward price momentum and a buy alert (red circles). The same is true for bearish clues on downside crossovers, but my observation is that this indicator is more reliable in identifying possible upside moves than it does downside moves. The second indicator is the Predicted Neural Index (gray line in bottom panel), a proprietary VantagePoint indicator that predicts whether or not a three-day simple moving average of typical prices will be higher or lower two days in the future than it is today. If the Predicted Neural Index reading is 1.00, it indicates the market will be higher in two days; if the reading is 0.00, it forecasts prices will be lower in two days. Dr. Gerald H. Meyer, currently a full professor and Director of Computer Science at LaGuardia Community College, the City University of New York, has verified VantagePoint claims that these Predicted Neural Index forecasts are 75% to 80% accurate for a wide range of markets over time so this is a good indicator to have on the side of your trading decision. The chart for December wheat futures shows a couple of places where the predicted moving average trend, the predicted moving average difference crossover and the Predicted Neural Index come together to forecast a turn from the long-term downtrend. Seeing the probability for a change in the trend and trading the turn are two different things. During the bottoming period indicated by the red circles, you had no idea whether the market would rally, go sideways or resume the downtrend to even lower, though unlikely, levels. But, after a downtrend like the one in wheat and with a market showing bottoming action, you are only looking for clues that the market is likely to break out to the high side. After several instances where the moving average difference and the Predicted Neural Index bullish clues resulted in no trade or in a losing trade, another set of bullish VantagePoint clues come together on Candle 1 in the red rectangle on the December wheat futures chart below -- the predicted medium-term moving average points up (although not yet above the actual medium-term moving average), the medium-term moving average difference is moving up and above the long-term moving average difference (red circle), the Predicted Neural Index is at 1.00 and a white bullish candle (close higher than the open) shows up. If you cannot view the chart, go here.

One strategy involves buying three contracts to provide some flexibility for taking profits or staying in part of the position for the longer haul. If you have a smaller account, that means you might want to trade the mini 1,000-bushel wheat contract, although daily volume is lower than you might like. To find actual points to place orders, VantagePoint's predicted next day's high (gold line) and predicted next day's low (pink line) offer some help. You have several possible entry points -- on the open of Candle 2 after seeing the VantagePoint signals on Candle 1, above the actual high of Candle 1, above VantagePoint's predicted high of Candle 2 . . . Whatever point you choose, the entry order is the easy part. The most difficult aspect of any trading strategy is developing the criteria to exit a position. The logical places might be below the previous lows at $4.39, below the actual low of Candle 1 at $4.426 or below the predicted low for Candle 2 at $4.505. Assuming you got into a long position around $4.70, the risk for a stop placed at $4.37, 2 cents below the previous low at $4.39, is 33 cents per contract or a total of 99 cents for three mini contracts ($990) compared to $4,950 for three full-sized wheat contracts. Placing a stop 6 cents below the predicted low and moving it as prices move reduces the exposure. Prices do dip below the predicted low on Candle 4 but not enough to trigger the stop so your long position remains intact. With the fundamentals as they are and potential resistance at the psychological $5 a bushel level, a strong uptrend is not a sure thing so profit targets will help you get what you can while you can. The first profit target will be 20 cents above the entry price of $4.70 or at $4.90 for one contract, and the second target will be 20 cents higher than that at $5.10 for contract 2. If you can lock in profits on those two contracts, you can ride the trend with the third contract, keeping a stop 6 cents below the predicted lows as they move up. As it turns out, this uptrend did have legs, perhaps making you wish you had bought the full-size contracts. But Monday morning quarterbacking in trading doesn't work well so accept the profits of 20 cents on mini contract 1 ($200) and 40 cents on mini contract 2 ($400) for a total of $600 for your little account with one contract still open. Although the predicted medium-term moving average (blue line) remained well above the actual medium-term moving average (black line), the medium-term moving average difference dropped below the long-term moving average difference (red circle on chart below), and the Predicted Neural Index shifted to 0.00, bearish signs. If you cannot view the chart, go here. Keeping a stop 6 cents below the predicted low put the stop at $4.95 on Candle 1. Once a stop is in place, it usually is not a good idea to adjust it lower with each new predicted low so the stop remained at $4.95 for Candles 2 and 3, barely avoiding being triggered for three days in a row. Then, as prices moved up, the predicted low moved up as well, and the stop was moved up to 6 cents below the predicted low of Candle 4 or to $5.002. Thus, the long position on one mini December wheat contract remained intact, and the stop keeps moving up as the predicted low moves up. Eventually, the stop will be triggered, of course, and after the uptrend, you can guess what to prepare for next: a trend reversal to the downside. But that's a story for another time, when a new set of VantagePoint clues can help you determine how to respond.

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Disclaimer: The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.