January 5, 2006
2006 Trade Number Two
No, this newsletter does not have anything to do with the weather. In this case, evaporation refers to how innumerable bull markets in futures do meet their end...that is, they do, more often than you would suspect, evaporate, melt-down, crash, collapse, implode, or totally disintegrate before bullish trader's eyes. What follows is a study of recent "tops" in the futures markets, presented with the intent of showing you some of what I see and hopefully persuading you to risk your money on "picking the top" in COPPER.
Top picking is just about the toughest trade there is in this business. For one, tops tend to be quite volatile, which aside from being nerve-racking, also means they can be expensive positions to take. When prices are high, and a market is banging back and forth in big chunks, futures margins tend to be higher, as are option prices as well. Psychologically, tops are also always accompanied by mountains of bullish fundamentals/logic/sentiment that make it difficult for the typical trader to even consider the idea of going short, much less to really "step up to the plate" even if they do see some sense in the trade. With everything out there arguing for higher prices, and the market doing just that, it is usually too frightening and it feels too stupid to say, "Here's my money. I'm going short."
Add to the fact that it is easy to be "early", have the market immediately go screaming higher, and find yourself losing a significant percentage of your investment before your brokerage statement has even had a chance to reach you....Maybe you're right, and the higher price just means a better sale, but all the volatility and bullish hype makes it easy to get scared out...to decide to take your money off the table and "watch it" for a while....Next thing you know it's suddenly dropping sharply and you don't have a clue as to how or where to get back in....I really could describe all sorts of ways that top picking can twist your mind, all of them meant to reinforce a market truism: Tops Are Tough.
But.....one of the biggest, fastest things that ever happens in futures is when a roaring bull market finally does quit. Aside from the generally accepted fact the futures markets tend to go down faster than they go up, there is the added fuel of what happens when a market is on bigtime highs and loaded with buyers who think that market is bulletproof......and it isn't. The results can be nasty and the best way to demonstrate this is simply to show you examples from just the past few years of bull markets that have come to an end....And I have to point out that none of them gave any clue the jig was up. In all of them, as it always is, all the "fundamentals" were bullish, and, at the very top, analysts expectations for higher prices were virtually unanimous....Certainly, there were a few negative opinions to be found in all of these examples, but I assure you, none of them were remotely close to understanding how quickly, and how far, any of these markets were doomed to fall....Futures have a way of going a lot further than anybody sensibly expects, but the truth is, doing just that is somewhat of the norm.
Nine different market tops follow representing a broad cross-section of the primary futures markets we trade....I don't think there is any futures adage more accurate than, "It's always bullish at the top", and I assure you, this was the case in every single one of these examples taken from the last few years of trading. These are all very large moves---evaporations, etc.---and none of them were remotely expected by the masses....Following them is what Copper looks like today. Compare Copper with the examples, then decide for yourself whether the idea of shorting Copper is worth the risk...I sure as hell do...
Give me a call if you are liquid, are prepared to lose what you invest, and think this idea makes sense.
Thanks, Happy New Year...I intend to kill it this year...We'll see.
Note how virtually all of these markets reverse out of nowhere and then go STRAIGHT DOWN. The immediate move away from the highs is usually very quick and if you are not already "on", it is very difficult to then find an entry point...
Here is the current May 2006 Copper contract. The futures contract expires in 143 days. I think this is more than enough time to see this market totally fall apart...
And one more time, here's the long term chart....
January (spot) Copper was down 7.80 cents ($1950 a contract) today. I don't know if this is the beginning of the collapse but any day like this certainly might be....If you think this is worth looking at, DON'T put off calling me....Happy New Year.