Charts have predictive value for this reason: Large and informed buying and selling can't be hidden; they show up in market movements. In this issue I'll share with you some predictive chart techniques and present some interesting charts of certain commodities that represent potential trading opportunities.
I've found volume spikes (volume in one day at least 50 percent greater than the 30-day volume average) almost always take place at important price points. Take a look at the example of the Australian dollar.
June Australian Dollar
Note on the above chart how the volume spike took place nearly at the bottom of the move. The market then proceeded to trade above the rectangle drawn on the chart, with additional confirmation on the move above the 50-day moving average, represented by the green line.
In other words, three chart indicators came together recently and predicted a profitable trade here, a buy of the Australian dollar.
Let's take a look at another recent example, this time in the soybean market.
The soybeans formed a bullish bottoming pattern, termed a “head-and-shoulders.” When the market broke to the upside, the head-and-shoulders predictive move from about 890 to 940 was met (and exceeded) in only three trading days.
To summarize, here are some chart patterns to watch for:
- Volume spikes;
- Breakout above (or below) a rectangle formation;
- Breakout above (or below) a head-and-shoulders formation;
- Breakout above (or below) a significant (for example, the 50-day) moving average.
Now that you know what we're looking for, here are a few trade candidates.
May Crude Oil
Oil recently completed a head-and-shoulders bottoming formation and now has multiple closes above the 50-day average. The minimum upside price objective is $61 a barrel. This signal is valid as long as the market remains above $49.
The copper market recently broke above a long rectangle with a volume spike near the lows. The minimum upside objective is $2.40. With the market currently in the mid-180s, I'd consider this signal valid as long as the market remains above the 50-day moving average, approximately $1.64 as we go to press.
The platinum market registered the highest-volume day of the year on a surge to new highs for 2009. Continued strength would indicate a continuation of the up-trend. However, if the market lacks follow through, be careful; volume spikes can indicate tops as well as bottoms.
Because this market is in a well-defined downtrend, I view the volume spike as an indication of additional weakness to come.
June Canadian Dollar, June US Dollar, June Euro
The following three charts are for the Canadian dollar, the US dollar and the euro. All three have formed rectangles, and the odds favor a continuation of the trend once these markets declare themselves.
They'll declare themselves with a breakout, either side of “the box.” Watch for it, go with it, risking to the other side of the box for a projected move at least one additional box length.
There are no “sure things” when it comes to trading, and risks abound. Still, charts can help us place the odds in our favor when trading.
I wish you good luck in your trading, and hopefully I've presented a few markets to put on your radar screen.