Down But Not Out

It seems everything made a u-turn yesterday which of course affected our campaigns across the board. Let’s review the damage but instead of licking our wounds we’re actually going to use this as another valuable lesson in tape reading. That’s right – when sudden events knock you on your ass then learning from the experience is mandatory.

Copper didn’t play ball and I wound up taking the express elevator to the woodshed. But there’s a lot more here to see than just a stop out. If you direct your attention to the daily panel you’ll see that the tape was coiled up to the max after literally months of highly volatile churn. The long setup presented was the single best opportunity for copper to finally escape the trading range and turn all that volatility into something productive.

But it was not to be and although the bullish scenario cannot be completely counted out just yet the odds just decreased quite a bit and leave the door open for even more sideways churn. Buyers as well as sellers are on notice here and that leaves us without a clear direction. So at this point all we have left is highly volatile sideways tape. Which is excellent for nimble range traders of course.

The E-Mini is in better shape but the weakness we saw yesterday now needs to be recovered pronto or sellers may cease the opportunity to introduce a fast and painful leg to the downside which would most likely bring us to near 2285. Once again we are seeing less direction and increasing intra-day volatility which suggests we may be looking at a medium term top.

Crude also took it on the chin but miraculously yesterday’s sell off missed my trailing stop by a few ticks. And given the current snap back this would have been extra annoying. So far so good however. Clearly this contract has had its own share of volatility which has a tendency of trapping buyers as well as sellers in endless gyrations and then suddenly blast off in the opposite direction. We got a very lucky entry here last week and thus my expectations forward are (and should be) low.

Soybeans is not a contract we have been trading but since this is a tape reading lesson I definitely wanted to present it here. I often mentioned how futures contracts have a knack for picking a direction and never looking back. The daily panel clearly shows this type of behavior throughout its recent history.

For trend traders this is great news because a failure of support (or resistance) can turn into a very juicy contrarian campaign. A great opportunity, which I missed as I was on vacation, presented itself in March when daily support near the lower Bollinger gave way and resulted in a systematic long squeeze which continues to this day. The point of recognition of course was the spike low near 990 which up to this moment had looked like perfect support for staging a long campaign.

When the inverse, i.e. a breach of the SL, happened however the odds pretty much flipped on a dime and the rest is history. I have often presented binary campaigns, meaning a long and short entry at the same time, for this very reason. Some junior reason have sometimes joked that I could not be proven wrong this way. But missed the point for the very reasons explained above. Sometimes price finds itself at an inflection point where a few ticks separate high odds of a short resolution from similar odds of a long resolution. This is a great example of exactly such a binary situation and what transpired when ‘conditions on the ground’ changed in an instant. If you have ever served then I am sure you are familiar with that very phrase.

A few more goodies below the fold – we are looking at a swing trading example and I posted an update on a very important development I covered yesterday:

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