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Chart interpretation is subjective and can be more flexible. Traders can apply it to markets in many ways, depending on their style.
- Darrell Jobman |
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Today's Featured Article
Chart analysis has some basic tenets -- trendlines, support/resistance, breakouts, etc. -- but chart interpretation is rather subjective and can be applied to markets in many ways, depending on your trading style.
You may be a sprinter who likes the short, quick races -- in and out and done in seconds. Or you may be an endurance runner who likes to go distances with a trade. Or maybe, like many of us, you are somewhere in between -- a middle distance runner who doesn't have the speed to be a good short-term sprinter but can move quickly when necessary and also has the stamina and patience to let a race or a market move unfold.
In general, here's a setup I like to see for any time frame:
- A string of white (bullish) or black (bearish) candles showing a directional trend.
- A consolidation or congestion area or pause in the trend that appears ripe for a breakout.
- A previous price that provides key support or resistance.
- A candle or candles that suggest a trend change or perhaps a pause.
- Indicators forecasting a potential trend reversal or strengthening.
- A fundamental perspective that is in line with a technical conclusion.
Sometimes these conditions come together nicely for the longer-term runner as they did with December cotton futures, which rallied in late June into July while many other commodities, including crude oil, the leader of the commodity world, dropped. Cotton futures had drifted down more than 10 cents a pound from a January high to the early March low near 46 cents before stalling out and moving sideways (1 in the red circled area).
 If you cannot view Cotton Chart 1,
go here.
The low was in the vicinity of previous lows in November and December, and the candles began to get whiter or bullish. That fills the traditional chart requirements mentioned above.
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VantagePoint Intermarket Analysis Software contributes the technical indicators. The predicted medium-term moving average of typical prices (blue line) crossed above the actual medium-term moving average of the close (black line), and the predicted differences in moving averages for several time periods (green and blue lines in bottom panel) were both pointing upwards (2), sold bullish clues.
So the conditions were in place for a price reversal into an uptrend. All that was needed was a breakout above the previous highs (green dashed line on chart). That came from a fundamental spark on March 31, the day the planting intentions report showed less acreage (3, red arrow), putting fundamentals on the bullish side, too, and launching the uptrend.
After a nice run of nearly two months, matching the rallies in stock indexes and some other key commodities, it was time to look for an exit and perhaps a reversal to a downtrend as the bullish enthusiasm in most markets began to wane. That clue came when the predicted medium-term moving average dropped below the actual medium-term moving average (1 in red circle on chart below), and the predicted differences in the moving averages turned down (2) in mid-May.
 If you cannot view Cotton Chart 2,
go here.
The long uptrend favored the endurance runner but after the downturn, it was time for the short-term sprinter strategy as the chart patterns and
VantagePoint indicators tracked back and forth. Once the second attempt to exceed 63 cents was turned back, the key point was 55 cents, the 50% retracement area of the move from the March low to the May high (green dashed line). That is where a battle for control could be expected.
 If you cannot view Cotton Chart 3, go here.
When support at the 50% retracement area held, the situation was somewhat similar to the start of the price rally in March. The predicted medium-term moving average (blue line) began to move up, crossing above the actual medium-term moving average (black line) and getting another big boost from fundamentals on the day after the June 30 planted acreage report, marked by the big white bullish candle (1 in red circled area). The predicted difference lines in the bottom panel also angled upward (2).
But in this case, the previous high from May around 63 cents a pound looked like formidable resistance (red dashed line) although the candles remained white and bullish (3). Fundamentally, the U.S. Department of Agriculture reduced its carryover figure 600,000 bales in its July supply-demand estimates, a bullish factor, but the world still has a lot of cotton and global economic conditions would not seem to be conducive for increasing demand and extending the price rally much further.
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But cotton still had a few surprises after already rallying 25% in three weeks. So the question now is how to trade this uptrend.
One strategy that can take quick profits or stay in a move is based on
VantagePoint's predicted next day's highs (gold line on chart below) and lows (fuchsia line). One might also use pivot points or some other channel indicator in a similar manner, but the basic strategy buys three contracts initially 50 points above the predicted high and then takes profits on one contract each 100 points higher.
 If you cannot view Cotton Chart 4, go here.
June 30, the day of USDA's planted acres report, produced a whipsaw trade but here's how the strategy worked over the next few days:
July 1 -- predicted high at 58.58 cents, and a buy stop 50 points above the predicted high bought three contracts at 59.08 ("Buy" on chart). The first target 100 points higher at 60.08 (T1) was hit the same day for a 100-point gain.
July 2 -- Target 2 (T2) at 61.08 cents was reached the next day for a 200-point gain.
July 7 -- After failing to reach Target 3 (T3) at 62.08 cents, the third remaining contract was stopped out at 58.88 cents, 50 points below that day's predicted low of 59.38 ("Stop"), for a loss of 20 points on that contract.
Net: 280 points on this series of trades.
July 9 -- predicted high at 59.87 cents. A buy stop 50 points above the predicted high bought three contracts at 60.37 (second "Buy" on chart).
July 10 -- Target 1 (T1) is hit at 61.37 the next day for one 100-point gain. Target 2 (T2) at 62.37 is hit the same day for a 200-point gain on the second contract.
July 14 -- Target 3 (T3) at 63.37 is reached, producing a 300-point gain on the third contract.
Net: 600 points on this series of trades.
With nice profits from the first two contracts already in the bank, an alternative would be to stick with this third contract and, instead of taking a target profit, placing a stop 50 points below the next day's predicted low. That alternative would still have you holding the third contract on July 21 with a stop at 63.08 cents, 50 points below the predicted low of 63.58.
If the cotton uptrend continues, you are still long one contract and can continue to move stops 50 points below the predicted lows. If the market reverses, as
VantagePoint's flattening predicted moving average difference lines in the bottom panel hint could happen, you are out with a profit of 271 points on the third contract.
You can make plenty of adjustments to this basic strategy, of course, such as the number of points above the predicted high or below the predicted low or the distance of your profit targets from your entry point for the various markets you trade. This strategy isn't perfect, but it gives you a way to sprint to some profits quickly while staying in the longer race for larger potential profits on part of your original position.
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About the Author
| Darrell Jobman
has been writing about financial markets for more than 35 years, covering all aspects of the trading industry. A decorated Vietnam War veteran; he was a newspaper farm editor and editor of several agricultural publications before becoming an editor of Futures Magazine for more than 15 years. He has written and/or edited more than a dozen books on trading including The Handbook for Technical Analysis. His passion is helping others succeed by learning the "dos and don'ts" of trading. |
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