Wednesday, November 27, 2013

Nasdaq at 13-Year High!

Nasdaq closes above 4000 for the first time in 13 years. This is the headline for many of the financial websites, newspapers, magazines, least for today. Well no point discuss about technology stocks here in a futures trading blog. Today I am going to write about E-mini Nasdaq futures (NQ) and the Nasdaq Composite Index.

Nasdaq is trading above 4000 points but why E-mini Nasdaq futures Dec13 (NQZ13) is only hovering around 3450??? What could have been wrong in the market or calculations? Is Sept13 contract at such a huge discount to the cash market? Is there any arbitraging opportunity to profit from the price differences?

Before exploring about the potential trading opportunities, I want to know what is Nasdaq Compositie Index and E-mini Nasdaq Futures contract.

According to wikipedia,

The NASDAQ Composite is a stock market index of the common stocks and similar securities (e.g. ADR, tracking stocks, limited partnership interests) listed on the NASDAQ stock market, meaning that is has over 3,000 components. 

Then I looked for NQ contract specifications from CME website.

Did you notice that the underlying instrument for NQ is NASDAQ-100 Index and not the Nasdaq Composite Index that I've previously assumed it to be

According to wikipedia again,

The NASDAQ-100 is a stock market index of the 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index.

I made a blunder here. Ashamed to say that I trade NQ for such a long time but didn't know about the difference until today. This is probably due to the fact that I trade solely based on price action of a particular market without referring to either underlying instrument of the contract or fundamental information regarding the index.This applies to any indices futures trading which includes our very own FKLI and FBM-KLCI Index. My approach contradicts with many traders, who like to trade FKLI based on fundamental info of the 30 stocks in FBM-KLCI. They also like to compare FKLI and FBM-KLCI whether futures is premium or discount against the cash market. There is no right or wrong, as long as they are able to prove that their trading strategy is working and can produce consistent profits.

Friday, November 22, 2013

Palm Oil Up, Soybean Oil Down. Then How?

"I didn't long CPO because Soybean Oil is bearish."
"I should have long palm oil even though soyoil is bearish."
"I short palm oil because I believe eventually palm oil must follow soyoil to trade lower."
"2600 is top already, short the way to 2300."

Sounds familiar? Many traders relayed their palm oil trading experience with me. They couldn't believe palm oil price is rising. They either not participated in the rally or went short the market. Eventually they have to part with their money and blamed the market for their own trading. I wouldn't say market is wrong because I hold the believe that "Market is always right".

So, why palm oil didn't follow soybean oil to go south? Ringgit appreciation? Biodiesel factor? Weather? Export figures? Inventory? China buying for LNY? Well, personally I don't know the reason and I don't see the need to know the exact reason(s).

Soybean oil futures is drifting lower while soybean futures is forming higher high and lower low. I dislike the price action in soybean futures because the volatility is increasing while market is going nowhere. This kind of pattern takes out a lot of stop-losses, causing injuries to many trend traders' account. While inevitable, losing hurts in terms of monetary and psychology.

From the chart, FCPO is bullish. Ask a 5 year old child to define the trend, he will tell you exactly where the market is going. Often, adult has too many prejudices and likes to make simple thing complicated. If the trend is bullish, trade the long side only, that's it. But wait.... soybean oil is bearish! Here comes the question, which direction is right? The answer is a simple one:
The market is always right. 
FCPO is right. Soybean Oil is right. Soybean is right. If FCPO is bullish, trade from the long side only. If Soybean Oil is bearish, trade from the short side only. If Soybean is sideways, you can either trade both long and short, or sidelines yourself from the market. 

In trading decision making process, traders like to predict the direction of a particular market based on the various factors that will determine the supply demand relationship. This is OK if you have first hand information and possess the necessary knowledge in term of fundamental analysis to support your research and analysis. Unfortunately most traders / speculators / punters do not. They rely probably on news report, export figures, inventory level etc to support their "opinion" of the market, then trade on their desired direction, hoping market will move according to their wishful thinking. Will this work? You have to ask them.

My way of decision is fairly simple. I read price action to interpret where the market is going and follow it. I don't possess in depth knowledge about fundamental analysis and don't access to latest export or inventory data. I am basically a trend follower. If the market is trending upward, I will trade from the long side and try to follow the trend till it end. On many occasions, after I initiated a position market reversed and hit my stop loss. I admit defeat and carry on. By managing my risk prudently and control my emotion, hopefully I can ride through the drawdown that is inevitable in trading and come out alive.

Wednesday, November 13, 2013

Which market is stronger?

I show YM (Mini Dow Futures $5), NQ (Mini Nasdaq Futures), ES (Mini S&P 500 Futures) and TF (Mini Russell 2000 Futures) in the chart above. Through out 2013, no doubt Nasdaq is the best performer. However for the past week, Nasdaq seems to lose strength relative to S&P 500 and Dow. From the chart, we may say that the strongest of the four is YM.

Why I want to compare their strength? Obviously for trading reason. I hold a believe that if I want to buy, I will buy the strongest market. Conversely, I only wanted to short the weakest market. Usually strongest market will perform better if market trends up and weakest market will drop faster and bigger in magnitude in overall bearish environment. By capitalizing this strength differences in several similar markets (in this post all indices futures), I hope to capture the biggest and most profitable move.