How To Catch An Explosive Reversal
Traders eyed yesterday’s powerful rally in coffee with
suspicion and sold, erasing nearly all of Monday’s gains that had sent the
commodity on its biggest rally in six months. Monday’s 7% jolt was viewed as a
short-covering rally, where an unusually large number of players who were short
(see yesterday’s Futures Market Recap regarding last Friday’s Commitment of
Traders Report) had to scramble to cover positions once stop-loss orders were
hit. But market participants today said that this market ran “too far, too
fast,” and origins, or coffee producers, took advantage of suddenly higher
prices and traders caught up in the windfall cashed out in profit-taking.Â
Here’s how you could have taken advantage of the
implosive reversal that left nearby July coffee
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down 3.15 at 61.60. Markets that re-visit 20-day highs (of lows) have a tendency
to reverse in a pattern popularized by Connors and Rashke’s book Street
Smarts. These patterns, Turtle Soup Plus One
Sell setups, are detected for you every day on TradingMarkets Futures
Indicators pages. This strategy goes short at a previous 20-day high made more
than four days ago and uses the high of the prior day (for a sell setup) as the
stop. Coffee tumbled more than 6% before settling down 4.86%.Â
Also in the softs but going the other way, July cotton
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made good on its Turtle Soup Plus One
Buy
signal and traded as high as 47.55 before closing .49 higher at
47.02.Â
Stock index futures had good intraday range after a
strong start.
Nasdaq 100 futures
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settled down 32.50 at 1786.50.
S&P futures
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peak before closing down 9.50 at 1216.50.
In the energies June unleaded gasoline
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the leader for over one week on the Momentum-5
List, gapped to a contract high, rallied to a peak of 1.0870, then pulled
back to close the gap, following an explosion at a refinery near Los Angeles
harbor. Officials at the refinery did not initially say how much production
would be effected, but fears that supplies could dry up eased after it became
apparent that no damage was done to the refining areas of the plant. Unleaded
edged a gain of just .0007, closing at 1.0700.
June crude oil
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flat at 27.28.
And at least three arguments exist for a more bearish
stance in unleaded. One, refining margins for unleaded–the difference between
the price of crude and the price of refined gasoline–are large. Two, recent
APIs have shown slower drawdowns in national unleaded inventories, implying that
retailers have already stocked up to meet expected heavy summer demand and will,
therefore, not require as-large-as-priced-in supplies of unleaded in coming
months. Three, gasoline just made its biggest two-week price jump ever: With
prices near the 10-year record hit last summer, drivers will scale back on their
demand for gasoline, which could have the “conservation effect” of
lowering prices.Â
Although consumer confidence fell last month, traders
appeared to take notice that data from the Conference Board’s index today came before
the Fed’s surprise rate cut last week. This means that the additional .50%
rate cut that occurred will likely make consumers more optimistic about the
economy and will be reflected in next month’s consumer confidence report. This
perception of recent Fed activity and consumer confidence bolstered the view
that the economy will continue to show signs of recovery and spur an up-tick in
inflation. Additionally, high gasoline prices were barely priced into last
month’s CPI and the biggest increase in gasoline prices ever (noted above) will
likely jack up the inflation rate next month. This reduces the likelihood of a
serious rebound in T-bonds
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multi-month lows. T-bonds closed 8/32 lower at 101 0/32.