1

MTA EDUCATION SEMINAR 2005

ADVANCED CMT TOPICS

Commodities

Mike Rocca, CMTCargill, Inc.World Trading UnitAgricultural Option Trader & Technical Analyst

2

BACKGROUND

August 1992 : Hired as Accountant

1996 – 2000: Full Member Chicago Board of Trade representing Cargill Oilseeds

2000-Current: Trade option Book for corn, wheat, soybeans, soybean meal, & soybean oil

Technical analysis on those and other commodities as well

3

Technically Analyzing: Commodity Futures for Cargill

Begin by providing a comprehensive weekly analysis on all 5 specific commodity futures markets and outside as appropriate

Comment on last week’s performance Identify and comment on overall broad pattern Comment on short term technical points/patterns Comment on Fund positions & expected “trigger”

points Identify Stop & Reverse points – if any Project weekly range Advise technical game plan

For purposes of this meeting, we will focus solely on CORN…….

4

Outside Markets

Commodity Research Bureau Futures Index (CRB)

Basket of 21 actively traded commodity markets

The accepted measure of the overall price and trends of commodities.

5

1

2

3

4

5?

1

3

2

4

Definite UptrendDefinite Uptrend ” ”Possible” completed 5 wave patternPossible” completed 5 wave pattern 300 psychological & 290 key channel300 psychological & 290 key channel support levels identified. support levels identified. Conclusion: currently sideways toConclusion: currently sideways to corrective px action, approaching corrective px action, approaching key support levels. key support levels.

6

US Dollar Index Futures Contract

A trade-weighted geometric average of 6 currencies

Symbol = DX

7

Downtrending momentum significantly damagedDowntrending momentum significantly damagedPotential “basing” action occurringPotential “basing” action occurring85/87 key resistance85/87 key resistanceConclusion: sideways to higherConclusion: sideways to higher

8

Outside Market Conclusion

Consistent with John Murphy’s Intermarket Technical Analysis text, we may be seeing a L/T shift whereby strengthening $ will put broad pressure on commodities as measured by the CRB.

9

CORN

L/T weekly continuation chart

10

Broad pattern interpretations such as Elliott Wave Theory is Broad pattern interpretations such as Elliott Wave Theory is complicated by the expiring nature of futures contracts and complicated by the expiring nature of futures contracts and resultant spreads. This can generate significant gaps in price as resultant spreads. This can generate significant gaps in price as old futures contracts expire and new futures contracts become the “lead” old futures contracts expire and new futures contracts become the “lead” month. month. Nonetheless, it is important to have broad based opinions.Nonetheless, it is important to have broad based opinions. Therefore, basis below, conclusion is that nearby corn today is at Therefore, basis below, conclusion is that nearby corn today is at levels that previously have proven to be a “value”. levels that previously have proven to be a “value”. Specifically channel has been violated. Prices then failed at trend lineSpecifically channel has been violated. Prices then failed at trend line retest. retest. Pattern of “basing” now expected.Pattern of “basing” now expected.

11

Seasonal tendencies must be acknowledged

Employ detrending approach Moore Research, Inc. for specific futures seasonals

12

Oct. 97

Aug. 98

May 00

Aug. 00

Aug 02

JlY 03

Mch 04

Nov 04

Detrending approach reveals the tendency for corn toDetrending approach reveals the tendency for corn to post lows in August. post lows in August.

13

14

Value and Open Interest

When analyzing commodities, it’s imperative to focus on the futures contract with the highest open interest.

CN5

15

16

Draw trend lines as first step in identifying levels of support andDraw trend lines as first step in identifying levels of support and resistance. resistance.

Price breaks out ofdown trending channel

in gapping fashion

Neckline

Prices failingat 210 resistance

LShldr

Head

Rt shldr

17

Determine if the market is trending strongly upward, downward,or sideways……Determine if the market is trending strongly upward, downward,or sideways……

18

-4-9-18

Overlay 4,9,18, 50 & 100 day simple moving averagesOverlay 4,9,18, 50 & 100 day simple moving averages to be used if trending bias is determined. to be used if trending bias is determined.

19

Identify what short term momentumIdentify what short term momentumoscillators are saying in the event myoscillators are saying in the event myoverall bias is sideways/range bound.overall bias is sideways/range bound.

20

The funds have become an increasing force in our markets.

The commitment of traders released every Friday requires constant monitoring.

21

22

The CBOT is expanding fund limits to accommodate a larger fund presence.

23

CBOT SPECULATIVE LIMITS000’s contracts

Single Monthcurrent proposed

Corn 5,500 13,500Oats 1,000 1,400Beans 3,500 6,500Wheat 3,000 5,000Oil 3,000 5,000Meal 3,000 5,000

All Months Spot Monthcurrent proposed current

9,000 22,000 6001,500 2,000 6005,500 10,000 6004,000 6,500 6004,000 6,500 5404,000 6,500 720

24

When price crosses 50 day simple Moving Average AVDWhen price crosses 50 day simple Moving Average AVD MACD crosses its ZERO line, typically the fund reverses positionMACD crosses its ZERO line, typically the fund reverses position

25

Technical Summary for CN5

Current technical momentum is slightly bearish

CN5 205 support is vulnerable on the next test

200 support is the next psychologically important support

The nearby continuation chart suggests price action should continue to GRIND to the low 190’s possibly 180’s in late August where detrending approach would suggest another seasonal low may be in.

26

Technical Summary for CN5Continued

On the upside 210 consolidative lows & 210/212.50 gap represent first resistance. Current slightly negative technical momentum has been generated off failure of same.

213/215 BB mid-point next resistance that if overcome dependant on timing would likely generate a MACD cross from (5) that would more strongly suggest 100% exiting of shorts.

Violation of 217/220 (50 & 100 day moving averages) would generate a MACD cross through its zero line and suggest new longs.

27

Technical Summary for CN5

Continued

Projected Range 212.50/200

Tech Game plan: Tradable shorts tonight. Profits taken 205/200. Shorts stop loss on close + 210.

28

Conclusion & General Comments

Broadly the same rules apply when applying TA to commodities as Equities.

Challenges arise when analyzing L/T continuation charts due to the expiring nature of commodity futures contracts. This limits the application of certain approaches including EWT & gap expectations and interpretations.

One of the unique aspects of commodities is attention to fund positions & behavior; they can often frustrate those paying attention to only fundamentals.

29

Conclusion & General Commentscontinued

Discipline: Commodity markets are heavily influenced by periodic USDA Supply & Demand reports.

This absolutely requires the technician analyzing commodities to have predetermined stop losses and profit objectives on every trade.