March 24, 2005

Welcome to the eighth edition of Fast Break "Ask an Expert." Today's market expert is Sterling Smith.

Sterling is developer and publisher of the FuturesOne Power Index, and a 15-year market veteran. Registered as a CTA he is a noted Coffee, Sugar and Cocoa analyst. Sterling works with clients of all sizes to help improve their trading.

Complimentary Power Index and FundFactor from FuturesOne

Commercials? Commodity Funds? Learn how to better understand their role in the marketplace with FuturesOne Power Index reports. Sterling Smith of FuturesOne brings you weekly reports with exclusive FuturesOne Analysis. Gain insight on market direction with your complimentary 3 month subscription to the FuturesOne Power Index and also get the FuturesOne FundFactor.

QUESTION 1
Roger from Texas writes:
What market indicators do you feel are the best to use: Moving Average, RSI, Bolinger, etc....? I realize there are many other considerations.

Before choosing an indicator, the most important thing to consider is your time horizon. When I look to trade my "3-3 package" (three days to three week) horizon, I look to build a preponderance of evidence before actually making the trade or the recommendation. The first thing I look at is my FuturesOne Power Index (FPI) as this lets me know what is going on with the key participants.Next, I check the fast stochastic, and bollingers, to see if they support my thinking on the trade. If they don't---The trade gets shelved.

If I am trading something on my "4 and out" (an intraday technique) my indicators are much different. Short term trading, in my opinion is much more difficult to do well with versus position trading. Since potential gains are so limited, the risk controls have to be very tight, so your indicators have to be much sharper. I generally use a 4 minute chart, combined with a fast stochastic, as part of that package.

The most important thing to remember about technical indicators is that they were never really meant to be "stand alone" indicators. The nature of things prevents a "Holy Grail" from being possible. This should be part of your trading package, but not your entire trading package.


QUESTION 2
jsg from New York writes:
Everywhere I look I see higher prices (gas, food, housing). However, "official" data says there is no threat of inflation. No doubt higher energy prices will be passed on to consumers who will be paying even higher prices. So, as an investor/speculator should I consider inflation when making trading decisions?

We should again consider the time horizon and the difference between "trading" and "investing". I view investing has something of a longer term, more stable situation. I view trading as something which can be done more frequently and aggressively.

Given the vast price difference in the exact same product throught the United States measuring inflation is a very difficult task, and far from an exact science. A simple example is the price of a gallon of gasoline in the Chicagoland area...it can vary as much as 50 cents depending on where you are.

Two things cause real inflation: Too much money or too little goods.

The inflation of the 1970's experienced in the United States, in my opinion, had less to do with energy prices, than it did with socio-economic changes, and baby boomers coming of age in terms of consumption.

We may well be on the precipice of a similar situation, only this will be a global change. China is coming of age. The July 2004 population estimate was 1,298,847,624. The United States population was estimated at 293,027,571 for the same time frame.

So, for every American there are about 4.4 Chinese. U.S. Per capita GDP is $37,800. In China it is only $5000. As the economy grows there, consumption and demand will grow. Social changes are already beginning to take hold.

If (when) China's per capita GDP doubles, it will be only about 1/4 of the United States. Given the vast population, the demand on resources will be great. Higher demand can be a harbinger of higher prices. I think we are beginning to see that right now in the energy markets amongst others.

In terms of investing, it is my belief that you would want to be on board with entities that will benefit from the changes going on in China. I would be cautious about instruments that can be hurt by inflation.

In terms of trading, or more specifically commodity trading, I would look for volatility, with demand climbing we should see prices generally climb. Along with this, we should see new pricing paradigms for many commodities. I think we are at the beginning of a golden age for commodities.

Complimentary Power Index and FundFactor from FuturesOne

Commercials? Commodity Funds? Learn how to better understand their role in the marketplace with FuturesOne Power Index reports. Sterling Smith of FuturesOne brings you weekly reports with exclusive FuturesOne Analysis. Gain insight on market direction with your complimentary 3 month subscription to the FuturesOne Power Index and also get the FuturesOne FundFactor.

QUESTION 3
Chuck from Eau Claire, WI writes:
How much of an effect have commodity funds had on prices lately? Is their participation more than in the past? And if so, to what degree?

This has been the big story for 2005 in futures trading. Billions of dollars have poured into commodity trading funds, hedge funds and commodity index funds.

We have seen the CRB index reach multi year highs. As expected along with that rise, many commodities have moved up in price.The bigger influence though, is on the day to day, and week to week market movements.

The fund positions in many of the regularly traded markets have become quite large relative to the commercial positions. Yesterday (03/23/05) was a prime example of this sort of chain reaction behavior tied to fund behavior. When Mr. Greenspan hiked interest rates, the dollar jumped as well. The currency fluctuation caused the physical commodities markets to sell off.

When you build a trading plan, you need to examine what these 800 lbs gorillas that move like gazelles are up to.


QUESTION 4
DSC from California asks:
Question: Short, medium and long term analysis of crude oil.

I think we have made a long term change in the energy markets. When I was in high school in the very early eighties, I drove my father's rather large Buick. It held about 26 gallons of gas, would go about 350 miles, and cost $25-30 to fill up. 25 years later my Chrysler 300 costs about $25 dollars to fill up and goes about 350 miles. Better technology is always a factor.

If we compare the current price of crude oil, to how much many other things have risen in price, it's clear that prices could certainly still go higher. I think this is just something we are going to have to learn to live with, and something that economy is going to have to learn to grow around.

Near term (30days) I think $50bbl is cheap and $60 is dear. Medium term (30 to 120 days), I would think $46 is going to be bargain and maybe $70 on the top end. Longer term (120 days to 18 months), $78-80 on the top side and maybe $55 will be seen as a bargain.

Complimentary Power Index and FundFactor from FuturesOne

Commercials? Commodity Funds? Learn how to better understand their role in the marketplace with FuturesOne Power Index reports. Sterling Smith of FuturesOne brings you weekly reports with exclusive FuturesOne Analysis. Gain insight on market direction with your complimentary 3 month subscription to the FuturesOne Power Index and also get the FuturesOne FundFactor.