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Current Futures Markets, Today's Trends and Trades

With Dr. Alexander Elder ISSUE 503 | MARCH 2006

Renowned trader, author and psychiatrist Dr. Alexander Elder joined Lind-Waldock for a thought-provoking webinar on March 2, 2006. He shared his views on which markets he believes offer opportunities, as well as his approach to trading and technical analysis. We share some of his thoughts here; you can listen to the full presentation and view the charts indicated via our webinar archives.

Elder was enthusiastic about futures trading right now and offered some general tips for new traders, as well as markets he felt offered compelling opportunities. He said even though the stock market may be bullish, it will not likely see the type of "crazy runaway market" of the 1990s anytime soon, and that means money is likely to continue flowing into commodities—and create opportunities.

"Bubbles are forever formed in financial markets. There is a long-term pendulum between paper and real assets. We had a crazy bull market in paper assets. I think the next crazy bull market is going to be physical assets, commodities. Now is a good time to be learning to trade commodities," said Elder.

General Advice

His general advice for those new to futures? Start trading safer, less volatile markets. Trade the mini-sized contracts, as opposed to full-sized ones. He said beginners often make the common mistake of trying to make a lot of money in a hurry. "Your first goal should be to learn how to trade, and you should start trading small size," he said.

Elder said most people who "stumble into futures" get banged about quite a bit, and even he had an education of hard knocks when he started out as a trader. The reason futures can be more difficult, or risky to trade than stocks is due to leverage. "If you are trading stocks, the broker will ask you to put down at least 50 percent margin. When you trade futures, you can trade them on 5 percent margin. That's leverage," he said. Leverage can hit your pocketbook both ways--when you are right, you are very, very right...but when you are wrong, you are very, very wrong.

What every trader must do is calculate how much risk he or she can comfortably handle, Edler said. Find out how many unsuccessful trades in a row you can stomach, without damaging your account severely. "I love trading futures. But you have to be a better money manager to trade futures," he said.

Markets to Watch: Crude Oil

First, Elder cautioned that his analysis of the markets should be taken purely as educational in nature and as a demonstration of how a professional trader might approach markets—not as trading tips. That's because there are so many different ways to trade, and because markets move and change very fast. What's true today may not be true tomorrow, and Elder said his opinion may likewise quickly change.

Looking at price action in crude oil futures in the first week of March, Elder said he's "a huge bull on energy." He said when you look at the monthly crude oil chart going back about 15 years, you see that it starts on the bottom left corner and ends on the upper right. "You don't have to be a technical analyst to recognize this is a bull market in oil. It's not that the world is running out of oil...but the era of cheap oil, plentiful oil is over," he said.

OPEC has controlled the price of oil for the last 30 or so years by reducing output, Elder noted. But last year, they gave up on quotas. "While OPEC is saying to its members, 'pump all you can,' oil prices are trading at their historical highs. If this not a tight market, I don't know what is," Elder said. "We are in a fundamentally bullish situation with crude oil." As a trading strategy, he recommends watching the charts, and waiting until the market gets away from value, represented by a slow moving average. (Elder focuses on moving average convergence/divergence, or MACD.) Bears are going to take charge when the market gets ahead of itself, but Elder said the fundamentals are such that surprises are likely to favor the upside.

"What can happen that will suddenly push oil prices down? What event can do that? Meanwhile, any kind of political event, weather event, disruption in supply event, will push prices up. I might stand aside, but you aren't going to see me shorting energies," he said.

Markets to Watch: Euro and U.S. Dollar

Looking at price action in the euro, this market began trading at 85 cents to the U.S. dollar. It then rose as high as $1.35. The euro topped out early in 2005, then had been declining by year-end. Elder said trends develop a certain inertia and people get used to them. After a year they got used to the fact the dollar is getting stronger and the euro weaker. But he believed now the euro is showing signs of "a major turning point" based on his analysis.

Elder said support and resistance points are not a glass wall, more like a wire fence on a farm. A bull or a bear can lean on a fence, even put part of its anatomy through the fence, but the fence is still likely to hold. That's what happened to the euro: the bears pushed on the fence, and the fence held. Elder said the MACD histogram was shallow amid deep bottoming price action in October 2005. Looking at the more recent bottom in February, the MACD histogram didn't fall below zero, but remained positive. "This type of pattern I call the missing right shoulder, massive bullish divergence," Elder said.

Furthermore, looking at daily chart of the euro, he saw a "beautiful false breakout" to the downside. "I think the euro is off to the races," said Elder. His near-term price objective is $1.24 to $1.25, but longer-term, he could see a new all-time high possible.

Markets to Watch: Metals

Taking a look at a weekly chart of gold, Elder saw a "fabulous bull market," with prices moving away from value and then back again. Every peak in gold showed a higher peak on the MACD histogram, which to him meant the market still hasn't seen its top. Elder noted that every so often, the weak holders panic, get out, and drive gold below value (its moving average). That's a great place to buy. As a trading strategy, he advised bullish-minded traders to wait until weak longs panic, and gold goes below value on the daily charts.

Turning to copper, Elder said the trend is likewise still up, but he's leery and waiting for an opportunity to short this market. Copper is completely tied into the business cycle, and used heavily in housing and construction. "If you are a bull on housing, a bull on construction, you should be a bull in copper...but if you think housing prices are in bubble mode, then you should be careful about buying copper," Elder said. He believes the latter, and is for now putting this market on the backburner to wait for a shorting opportunity. For now, this market is in top-forming mode, and getting in front of that trend can be a "very expensive" proposition, he said.

Deciding What, and How to Trade

Elder said he watches many markets, but noted some simply don't present viable opportunities at a given point in time, based on his approach. He advised new traders not to force a trade if the signals aren't there. "There are so many interesting and attractive markets to trade...if a signal doesn't jump out, go to the next chart," he said

He also said many individuals ask him about which indicator parameters to use. He said it really doesn't matter, but you have to have parameters that make sense. He studies moving averages, and said whether it's 26, 24 or 28 days really makes no difference. "As long as you pick up a length that's logical and consistent," said Elder.

While he tends to favor swing trading and follows MACD, he said his approach is not "the" approach, it's one of many. It's important each trader develop his or her own unique edge, he said.

Dr. Alexander Elder has published several books, including Barron's 2003 book of the year: Come Into My Trading Room. You can purchase it through our Traders' Catalog.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.