Is chocolate your thing?
If it is, you might want to stock up on discounted Easter Eggs.
According to scare stories in the financial press, global demand for chocolate is outpacing supply.
And it’s driving the retail price of chocolate through the roof!
But let’s not get caught up in the hype just yet…
As traders we can always take a step back, analyse the facts (as shown on the charts) and go with what we really see.
So we’ll be looking at the price of Cocoa futures in a minute. Now I know it’s not a market we’d commonly trade, but I want to show you this as an example. You’ll see how you can make your OWN trading moves, right in the face of any media coverage.
But first I want to explain exactly what it means to be in control of your own ‘personal economy’ and not have to pay any attention to anyone else’s opinions on the markets.
You see, once you know what to look for, the charts can have an eerie way of tipping you off to what the future has in store. And you definitely don’t need to know the reasons behind the market’s activity.
It starts with the age old argument about which is better… fundamental analysis, or technical analysis.
Fundamental analysis is all about crunching the numbers – using economic and financial data to calculate an asset’s value. Technical analysis is using the historical performance of an asset to indicate the likely future performance…
It’s the stuff we commonly use as traders – price charts, trading volume, and all the various indicators we can derive from them.
Now it’s easy to get lost arguing the merits of one method of analysis over the other. For me, I think they are both as important as each other. It’s just that once you become proficient in reading a chart (technical analysis) you’re actually killing two birds with one stone…
How you can ‘steal’ the work of fundamental analysts
By default, you’ll actually be ‘stealing’ the fundamental analyst’s work too because it will already be priced into the market.
I mean, let’s face it… there’s no way we’re going to compete with the big institutions for resources. We might as well accept the fundamental analysts (with their multi-million pound annual research budgets) have already done their thing and advised the institutional traders who have now positioned themselves accordingly.
So in effect, we can look at those trader’s actions as the ‘top-tier’ of market activity.
And it’s spotting their footprints on the market that lets us come into our own as lone-wolf traders. We don’t need any of their special privileges. We just need to learn a few tricks of the technical analysis trade and apply a bit of logical thinking to what we see.
So even though you might not know all the factors that contribute to the current market price, you can be sure that someone, somewhere DOES (and it will all have been taken into account, it will be priced-in).
I remember trading on the 7th July 2005 – the day of those terrible bombs in London. The market suddenly went crazy. You instantly knew something had happened even though you didn’t know exactly what. It was the knee jerk reaction from the institutions. They knew (and they took appropriate evasive action on their holdings) minutes before it actually hit the news.
And I’m not talking about making profits from awful events like that – those dramatic real-time reactions are more of a red-flag… get the hell out of the markets and cover your back until you know what just happened.
But to be a completely self-sufficient trader, un-influenced by third-party opinion, there are three key points to keep in mind..
The three steps to controlling your own personal economy
Why fall for all the financial scare stories in the media when you can use them to your advantage instead? Do it right and you can be master of your own personal economy. Here’s how:
1) Don’t pay attention to third-party market opinion
Easy said than done, I know. But give some thought to the agenda of the newspaper/magazine/TV show promoting particular stories. Is it a case of them using hyped-up headlines to shift more issues? Is there something even more sinister at work? It would be nice to think all the stories you read in the press are totally unbiased and objective but you can never be sure if there’s an ulterior motive (and on this theme, it can just as easily be the stories that deliberately DON’T get fully reported that really move the markets).
2) Buy the rumour, sell the news
If you can’t help but expose yourself to financial stories (and let’s face it, in these days of continual connectivity through social media etc… it can be almost impossible not to) here’s the next best thing…
It’s an old trader’s maxim and it basically tells us that by the time the news actually hits the market, all the pricing-in and positioning has been done. It’s also why the markets can sometimes move down on good news… the news was good, but not quite as good as expected (and priced for).
So the lesson here is along the lines of what we mentioned earlier – spot the volume being pumped into the market by the early institutional trade and you’re reading ‘the rumours’ right from the chart. You don’t know exactly what it is they know, but you might as well try and take a piece of the action for yourself. That is the time to get involved. By the time you’re reading about it in the paper, it’s old news.
3) Become an expert at spotting support and resistance levels
Historical support and resistance levels will show you how the market is likely to react at key price levels. All the chatter might be about a certain market rallying to dizzying heights but the facts you see on your chart might tell a different story…
There might be a huge resistance level created by historical high-volume trading the market must challenge and move through before it can climb any higher.
And just to be clear, it’s all about probability. You can’t say for sure the market will do this or it won’t do that. But taking what you see on your chart and thinking through the probable consequences can often give you an opposing (and often more profitable) outlook.
So let’s go back to that example of Cocoa futures now. Here are some snippets of news reports I recently came across:
“Demand rising at fastest pace in three years. Farmers in West Africa now growing enough cocoa to keep up. Costs reach a thirty-month high forcing confectioners to charge customers more”
Euromonitor International
“It’s definitely the first time where the chocolate has gone up quite noticeably. It is hard to work out what you can sell and at what price. The problem is it’s only going to go up and up and up”
Lucy Armstong Chocolates (established 3 years ago)
“The underlying concern is that there will not be enough cocoa available to satisy the appetite of customers”.
Andreas Christiansen, Hamburg Cocoa and Commodity Office
All valid comments in their own right. But in terms of usable trading information they only tell one side of the story. Let’s see what we can determine from the chart…
Cocoa Futures – Monthly Chart
So to be fair, the price action does reflect an increase in demand. We’ve seen that ten month rally beginning July last year.
But what those news stories fail to mention is that price has been up higher than current levels in 2008, 2010 and 2011. We’re hardly breaking new ground here.
And most telling of all, we’re only just knocking on the bottom of overhead resistance the market laid down in 2011 (see blue horizontal line).
Eight month’s worth of high-volume trading printed between $3000 and $3800 back in 2011 and we’re only just testing $3000 now.
The market has some serious work to do before it can break out higher. Not an impossibility of course, but remember to do your own homework and consider the probabilities before taking a position…
Because best of all, your Christmas chocs just might not break the bank this year after all!
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Be Prepared: Market Moving Data Coming This Week (London Time):
Wednesday 23rd April:
08:30 EUR German Manufacturing PMI
09:30 GBP MPC Minutes
15:00 USD New Home Sales
Thursday 24th April:
09:00 EUR German Business Climate Index
13:30 USD Core Durable Goods
Friday 25th April:
09:30 GBP Retail Sales
Monday 28th April:
15:00 USD Pending Homes Sales
Tuesday 29th April:
09:30 GBP GDP
15:00 USD Consumer Confidence
I hope you enjoyed this week’s letter. As always, drop me a line with any questions or comments and I’ll catch up with you next week.
