may 2009 - your markets monthly

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General magazine cover trading in financial markets, recommendations, technical analysis & trader psychology

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  • www.toptraderthinking.com Page 1 of 17

    TTOOPP TTRRAADDEERR TTHHIINNKKIINNGG YYOOUURR MMAARRKKEETTSS MMOONNTTHHLLYY

    In this edition:

    Market Update: As at 26 May by William Chien

    Spread Trading An Overview Guest Contributor: Guy Bower

    Technical Indicator of the Month: Relative Strength Index (RSI)

    A couple more Universal Blocks to Successful Trading (adapted from Bullseye by Matt & Sari)

    Spread Trading, William Chiens CFDs, CBR & PCD Advisory Recos update

    COMING SOON

    FREE TRADING WEBINARS BY MATT KIRK FOR WWW.TOPTRADERTHINKING.COM MEMBERS REGISTER YOUR INTEREST NOW. JUST SEND

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    May 2009 Volume 1, Edition 6

    Dont forget to join

    www.toptraderthinking.com

    as a FREE Member so you can access a whole lot of other great info for Top Traders!

    CONTACT US FOR A FREE EVALUATION OF YOUR SHARE PORTFOLIO OR TRADING HISTORY Matt.kirk@stonebridgegroup.com.au

    Jason.achjian@stonebridgegroup.com.au

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    William.chien@stonebridgegroup.com.au

    Or call us DIRECTLY (in Aust.) 1300 73 66 11 Outside Australia +617 5504 2222

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    PROGRAMS ONLINE TRADING PERSONAL SERVICE DAILY MARKET REPORTS

    AND MUCH MORE

  • www.toptraderthinking.com Page 2 of 17

    The Month So Far As at 26-May-09 By William Chien

    The local XJO index has rallied strongly from March 09.

    Furthermore, the rise in the XJO has been accompanied by a generally rising trend in volume as per the chart below.

    Based on the break of the downtrend line extending back from May 08, it is fair to say that the XJO index will rise further.

    A more detailed examination of the plotted trend channel lines suggest 2 potentially significant price & time windows as per circled areas.

    My analysis to date indicates the major stock market indices will likely continue their bull run til July/August 09.

    Please feel free to contact me by phone 1300 73 66 11 or by email william.chien@stonebridgegroup.com.au to discuss trade ideas.

    Our Affiliates & Partners include:

  • www.toptraderthinking.com Page 3 of 17

    Gold

    In the long term, I expect gold to head higher after a potential dip.

    A detailed examination of the daily gold chart (see below) leads me to identify 3 important price & time windows which will possibly serve as important levels from where gold may launch higher.

    Please feel free to contact me by phone 1300 73 66 11 or by email william.chien@stonebridgegroup.com.au if anyone wishes to discuss trade ideas.

  • www.toptraderthinking.com Page 4 of 17

    SPREAD TRADING AN OVERVIEW by Guy Bower

    What are spreads?

    A spread is where you buy one asset (contract, share, bond etc) and sell something related or similar with a view to profit from a change in the price differential. Here are some examples of spread trades:

    Buy (long)

    Sell (short) Why trade the spread?

    Apple Microsoft You may have a view that the earnings in one technology company are too high relative to the other and the stock prices are set to realign accordingly.

    Dec Crude Oil futures

    June Crude Oil futures

    This is a futures spread where you buy and sell the same market, but in different contract months. Temporary production or seasonal demand factors can make this kind of spread move.

    Live Cattle futures

    Lean Hogs futures

    This is a spread where you buy one market and sell a related market. Differing production and consumption estimates for each market can often provide good trading opportunities.

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  • www.toptraderthinking.com Page 5 of 17

    These are not recommendations for trades. They are just examples of spread trades. All spread trades are just positions where you expect the difference in price to move in your favour. As for futures spreads, these are simply spread trades in futures contracts (as per the last two examples and the following examples). Types of futures spreads

    Well be looking at two types of spreads using futures contracts.

    Intra-commodity spreads

    This is where you buy one delivery month and sell another in the same commodity (e.g. simultaneously buy August Soybeans and sell November Soybeans). These are also called calendar or time spreads for obvious reasons.

    Inter-market spreads There are also inter-market spreads where you buy one commodity and sell a related commodity (e.g. buy December Live Cattle, sell December Lean Hogs). Sometimes its easy to confuse the terms inter and intra. Dont worry about this so much. Its more important that you know the basic idea. Both types of spreads simply try to make money from the change in relative prices of the contract.

    At this stage, all you need to understand is the concept of going long one contract and short another simultaneously. There is really not a lot to it. A spread trade is all about making money from the relative change in prices.

    Spread charts

    If you are reading up on spread trading elsewhere, youll need to understand how spread charts are displayed. Generally speaking you will calculate the spread as the bought (long) side minus the sold (short) side. Some books on spread trading will show the near contract month minus the distant month for intra-market spreads, but this is a little confusing.

    For this article, well stick with bought less sold. This is also the way we display things on the eSignal charts shown throughout.

    Larry Williams

    Tom Scollon

    Daryl Guppy

  • www.toptraderthinking.com Page 6 of 17

    Examples of futures spreads Wheat

    This is an intra-market spread. This chart shows the difference between March and July Wheat as traded on the CBOT.

    Source: eSignal - www.esignal.com

    As you can see, the period leading up to October was very quiet. Then it just exploded! Spreads dont normally behave this dramatically, but occasionally they do. Not good if you are on the wrong side of it, but great if you are.

    Guy Bower

    Catherine Davey

    Sari Mustonen-Kirk

  • www.toptraderthinking.com Page 7 of 17

    Live Cattle versus Lean Hogs Here is another example. This one is a spread between two meats futures contracts: Live Cattle and Lean Hogs, both traded on the CME. This is an inter-market spread. As you can see this one has moved around quite a bit too.

    Source: eSignal - www.esignal.com

  • www.toptraderthinking.com Page 8 of 17

    Part 2 of Guy Bowers article on spread trading to follow in the June 09 edition of Your Markets Monthly

    Contributor information:

    Guy Bower is professional futures and options trader. Guy is the author of two books:

    Options: A Complete Guide and Hedging: Simple Strategies.

  • www.toptraderthinking.com Page 9 of 17

    TECHNICAL INDICATOR OF THE MONTH By: Jason Achjian

    Indicator Name Relative Strength Index

    Abbreviation RSI

    What The RSI is a financial technical analysis oscillator showing price strength by comparing upward and downward close-to-close movements.

    How RS = EMA (N) of U EMA (N) of D Where U = close of today close of yesterday And D = close of yesterday close of today N is the number of periods usually 14 EMA is an Exponential Moving Average This is converted to Relative Strength Index between 0 and 100 RSI = 100 100 x ___1___ 1 + RS When The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. The principle is that when there's a high proportion of daily movement in one direction it suggests an extreme and prices are likely to reverse. Levels 80 and 20 are also used, or may be varied according to market conditions.

  • www.toptraderthinking.com Page 10 of 17

    How to add this to your Charts in eBridge Trader Whilst in your workspace viewing a chart, click this symbol at the top of the chart, then >>> Oscillators >>> Relative Strength Index:

    The default fields that appear are the most commonly used settings for this indicator; however you can adjust them if you wish. You can also adjust colour and the weight of the line:

    To open an eBridge Trader account or get further information on adding technical indicators to charts using eBridge Trader please contact Jason Achjian. Email: jason.achjian@stonebridgegroup.com.au Phone: 1300-73-66-11.

    Click OK once youre satisfied with the settings (These can be adjusted later also). You will now see the RSI Oscillator added to your chart.

    You can later adjust settings by clicking the RSI at the top left of the indicator pane below the chart and then clicking on Properties, you can also delete the indicator from this menu.

    If theres any feature of eBridge Trader that youd like covered in next months news letter please email your request to jason.achjian@stonebridgegroup.com.au

  • www.toptraderthinking.com Page 11 of 17

    UNIVERSAL BLOCK GOT A HOT TIP?

    Sometimes I hear about a hot tip but Im not sure if I should take the trade or not. Whenever I jump on a trend my friend is on, the trend ends. When I dont get on board,