Monday, December 26, 2011

Crude Oil (CL) Weekly Outlook/Strategy (12/25/11 - 12/30/11)

I hope everyone had a very Merry Christmas with their loved ones! Crude's Santa rally appears to have severely damaged my bearish top thesis for the time being. Although we were looking for a bounce, I can say that a one-week move back to the top our channel was not exactly the expectation going into last week. There have been some key bullish indications taking place and will be something to keep in mind as we trade in the coming weeks. As you take a look at the charts below, please ignore the most recent candle on each, as they've been added by TOS and are meaningless at this point.

Weekly: We managed a very strong bounce off of a support confluence. The bottom of our kumo as well as the all-important 30-wk MA, resulted in a move that wiped out the prior weeks' fall. 

BULLISH indications: Chikou (red line) has now cleared prior price (noted by green oval). RSI has bounced off the 50 level. MACD, looking like a possible rollover has now firmly cleared the zero line and is headed higher. Tenkan-sen (light blue line) is rising and looks to be acting as support and the 30-wk MA is beginning to flatten out.

BEARISH indications:  We have still only backtested our channel break. Kumo is bearish, although it will flip bullish if we continue to stay at or above the current levels. 

We are beginning to see the potential for an inverted Head and Shoulders pattern setting up and technically our objective view would have to be neutral to bullish. I would flip back to a more bearish posture if we were to see a shooting star or reversal type candle on our next move back to the channel resistance.

Daily: We can see very clearly the channel that has developed. We are currently sitting at the top rail of our channel. Ideally, in the bullish scenario, we would like to see a small pullback to possibly the 97.5 area, which has been a key pivot in within this pattern. 

Kumo acted perfectly as support last week and may continue to do so going forward as it is in a solidly bullish trend. The 50dma is rising and acted as a support area as well. MACD has bounced off the centerline and a bullish crossover appears imminent. 

Chikou is currently hitting resistance at prior price. This along with our channel resistance speaks to a possible pullback this week. The major shorter term support levels looks to be 97.5 area along with 95.20 area. 

240 minute: Zooming into a better view of our channel, take a look at the volume pattern over the past 2 weeks. We saw a breakdown on strong volume which was followed by volume drying up significantly as we made lower lows. The bullish reversal occurred on stronger relative volume, and is now weakening as we make higher highs. MACD appears to be rolling over and RSI is overbought. 

On this chart we can clearly see the importance of the 97.5 area as a pivot within this channel, and how ideal it would be for a pullback here before any breakout of this pattern. I believe the 101.40 area should be a key level that needs to be broken and held in order to verify a legitimate breakout.

60 minute: The hourly timeframe shows a clear uptrend using the kumo. However, we can see the negative divergence building up as price makes higher highs and both RSI and MACD move lower.

A couple possible scenarios I will be looking for include:

A) An immediate move higher towards the 101.40 area early in the week. Followed by a pullback to our uptrend line drawn above.

B) A steady pullback towards 97.50 which would be a solid R/R buying opportunity for a break out the channel.

Finally, I will leave you with a chart of RBOB Gasoline. It has managed to hold its support level and break out on multiple timeframes through resistance and out of its downchannel. Gasoline has been the clear weak link in regards to price action in the complex and we saw relative strength from it on Friday. Thank you for reading and I would appreciate any questions, comments, feedback. Good luck to those trading this week!

Sunday, December 18, 2011

Crude Oil (CL) Weekly Outlook/Strategy (12/18/11 - 12/23/11)

If you're one of the few people who read my weekly outlook from last week, you weren't taken by surprise by the move we saw in crude this past week. Taking a look at the weekly charts of energy complex this week, I am beginning to see a bit of a mixed message. As you can see, heating oil (HO) has been exhibiting relative strength and will be key to watch going forward. 

Potential BULLISH scenario: we see the possibility of weekly flags/down channels developing in the complex. There is a very real possibility that we see a bounce over the next couple of weeks with a potential move higher through these channels to new highs.

What is keeping my BEARISH: Gasoline (RB) appears to be breaking down through its multi-year upchannel. It has been holding fairly tightly within a shorter term down channel but is sitting at a key support level at the 2.446 area. It is currently below the kumo which has flipped bearish and chikou firmly below prior price.

Both HO and RB have imminent MACD centerline crosses on the weekly charts. The MACD centerline has firmly respected in past uptrends and prior bearish crosses have led to substantial declines. Another level to watch would be the RSI falling below 40. This also tends to hold in uptrends and is broken prior to significant downtrends.

Looking specifically at the weekly crude oil chart, last week confirmed the backtest and rejection of our prior upchannel. This coincided with chikou rejection at June prices. We managed to find support at the tenkan-sen and bottom of our kumo. MACD also appears to be rolling back over.

The daily chart has the potential for a channel/flag to begin forming. We have had a bearish cross of the tenkan-sen below the kijun along with chikou falling below price. We also see a potential bearish MACD centerline cross. 

In the shorter term, the 95.20 area is a key area. Bullish above, bearish below. There should also be strong support in the 90.45 area coming from previous price as well as the top a bullish kumo. I've laid out a couple of possible moves in the near term. We should keep in mind that in the commodities, trends tend to persist with shallow pullbacks. If this is the beginning of a new downtrend, rallies will be shallow and it will be difficult to be able to find easy entries into a short swing-type position.

On the hourly time frame, we are firmly in a downtrend. However there area positive divergences as new lower lows in price were met with higher lows in both RSI and MACD. Although the 90.45-95.20 range I discussed is quite large, I believe that anything within this area will be noise and only for the very short term trader.

I will be looking to sell the 95.20 area or a break below 90.45 area. I do not want to be caught in "no-man's land" as @HCPG from the twitter-verse consistently refers to. There is the potential for a lot of random action going into year's end, but I have a short bias with distinct areas where I will be willing to do business. Also, keep in mind that we will be switching over to the G (February) contract this week.

Once again, thank you for reading and any comments or feedback are always appreciated. 

Saturday, December 17, 2011

Futures Setups I'm Watching (Week of 12/18/11)

Soybeans were on my radar most of last week looking for a squeeze out of this setup. Managed to take a bit out of it but I believe there is still solid potential for a significant move to the upside. Working out of a massive positive RSI/MACD divergence, its downtrend line was broken on volume Friday. It's been in a down channel for almost 3 months and was stopped at the top rail.

The hourly chart shows the resistance encountered at the top of the channel. One can enter on a break of this downtrend line or look for a pullback to the 1120 area. Shorter term resistance levels are 1145 then 1152. Support at 1120 then 1110 areas.

I've been tracking all of the grains for quite some time and felt their charts were some of the nastiest out there. But they've steadfastly refused to break. I am leaning towards wheat developing a falling wedge pattern here as it's made lower lows with positive divergence in the RSI and MACD. If this is the case, there is huge potential here. Of course another way to potentially play this would be through a long wheat - short corn spread I blogged about here.

On an hourly time frame, we've made a falling wedge and within that a small inverted head and shoulder pattern is potentially forming. A move above 586.5-587 on strong volume would be a signal to get long for me. One can also be more cautious and wait for this wedge to resolve to the upside.

I've never traded cattle before but I believe there is a potential short setup here in feeder cattle. We've been in an uptrend with a developing negative divergence. Above is the H (March '12) contract but a similar pattern is forming in other contracts. Kumo has flipped bearish with the tenkan-sen below the kijun-sen. Chikou span (red line) has moved below price. I think a break here gives a solid 10 points of downside. Take a look at Lean Hogs and its breakdown on Friday.

I will be taking a short only here on a break of this rectangle on the hourly to the downside.

Sunday, December 11, 2011

Crude (CL) Weekly Outlook & Strategy (12.11.11 - 12.16.11)

Since I've started a blog, I figured I may as well start to do a writeup of my weekly chart research / basis for intraday trading strategy of my favorite instrument to trade, crude oil. So here you a multiple timeframe analysis to give an idea as to how I will approach trading this week.

For those that have been following me on Twitter, you may know that I've been approaching crude with a "sell the rip" approach. The main reason for this is the weekly chart you see above. I am above the belief that crude has topped. It had been in a multi-year upchannel, which was broken on volume in August. This coincided with a break of kumo (cloud) support as well as an ichimoku trend change. 

Over the past 2 months, we have re-entered the kumo to backtest the channel. We printed a reversal candle  during the week of November 14th, and the channel as well as kumo resistance has held thus far. RSI also fell definitively below the 40 level which it has never done during its entire bull run.

I would admit I was wrong on a weekly close above the kumo or a failure to break and hold below the 92.80 level on a weekly closing basis.

Objectively speaking, the daily chart looks more bullish than the weekly. The near term trend has been up as is visible from the bullish kumo and we bounced off a rising kijun-sen (pink line) on Friday. We also have a rising 50dma, another confirmation of the nearer term trend. 

You can see the backtest of the bottom rail of our channel multiple times over the past few weeks, and numerous topping candles there. MACD has had a bearish cross and continues to point lower. A bearish center-line cross would be quite negative, in my opinion. The volume pattern has also clearly been negative in my opinion, where we've sold off or reversed on heavy volume, and moved higher on much lighter volume.

Strong resistance levels would be at 103.35 then 105.87 areas. Strong support would be had at 95.20 then 90.90.

On the shorter term hourly chart, you will notice we broke down out of a rising wedge on 12/5. We chopped around after this break holding the 99.90 area multiple times before definitively breaking through Thursday on heavy volume. We are currently at that critical level which may very well put a cap on this upside move. There is a confluence here with the kumo acting as resistance as well as the chikou facing the tenkan-sen and kijun-sen (noted on chart). 

If we aren't rejected here right at the open, I will be looking to short near the 100.70 area. Here we will most likely be coming up on our downtrend line along w/ another resistance area for the chikou. Thank you for reading and trade 'em well this week. As always any comments or questions are appreciated.

Sunday, December 4, 2011

Wheat - Corn Spread Trade Idea

As I did my research over the weekend, I was able to look through a variety of different commodity futures groups such as agriculture and energy to get a better handle on relative performance, historical relationships, etc. A potential trade that popped out to me was a spread trade, ZW-ZC. I have been quite bearish on the entire grains complex for the past month or so, in particular wheat. Although it has continued to grind lower, it hasn't broken as I had anticipated, but I noticed a clear weakness in Corn relatively over the past few sessions that was notable.

The chart above shows an 18-month performance comparison between Corn, Wheat, and Soybeans. Also included are ratio charts comparing the relative performance of each against the other. As is obvious, Corn has clearly been the outperformer of the group with Wheat bringing up the rear. However, the Corn:Wheat ratio chart shows a potential a potential topping type rectangle pattern. I would also note that the Wheat:Soybean ratio looks to be bottoming and the Corn:Soybean ratio is looking at an uptrend line test.

Looking specifically at the daily Corn chart, we see a clear year-long head and shoulder - type topping pattern. Corn seemed to have bear flagged near its neckline and has begun to break down. RSI is pointing downward, Stochastics look to be embedding to the downside, and the MACD failed to make a bullish crossover. Any technical analyst would most likely look at this chart and know where a confirmed break would occur.

The daily wheat chart is similar but a bit different. Wheat also has had a similar year-long head and shoulders type pattern. However, it has a downward sloping neckline, characterized by lower lows. As you can see over the past 2 months, attempts have been made at a breakdown that have failed. All the while, positive divergences have begun to form on the RSI and MACD. We look to have culminated in a fakeout at the end of November and broke a descending trendline on Friday.

The final chart is a spread chart of the H2 contracts (Mar '12). This chart indicates 1 contract long wheat for 1 contract short corn. Basically the difference in value between the two products. If this number is negative, corn is nominally more expensive than wheat, and vice-versa. Looking over the past decade or so, Wheat has had about $1.00-$1.50 premium to corn, although it has varied wildy at the extremes.

As you can see from the spread chart, a potential bottom looks to be forming. There is a significant positive MACD/RSI divergence and from an ichimoku perspective, price has cleared the kumo. I see the potential for an head and shoulders type bottom here and important trendlines have been marked. Ideally, I would like to see a move up to the trendlines and a pullback to the 15-18 area to hopefully be able to enter a position. I think an eventual move to the $1.85 resistance area is possible which would be a 400-700 tick gain/contract depending on entry.

WORD OF WARNING: As you can see from the spread chart, the intraday movement in this spread can get quite volatile. Over the past 6 months, there has been as high as 95 point intraday swing in this pair. As always, risk management is crucial. A difficult thing about executing this trade on IB, which is where I would be, is the lack of ability to place hard stops. If one isn't comfortable with this type movement I believe there are still two strong setups that I've posted above for each individual name. Good luck!