…it has probably already passed you by!

Those were the famous wise words of the rather flamboyant financier Sir James Goldsmith.  Well this week the wheat market became one of those bandwagons.  I know this is not a market that every reader of my articles will be following, but it provides such a good lesson in trader psychology that I want to spend a few minutes today discussing it.

Over the last few weeks this market has been having a spectacular bull run and in the last few days it went parabolic, as you can see in the chart below:

You may recall a similar thing happened in Sugar last year and I discussed that market at the time.  Today’s story starts on Wednesday, 2 nights ago, when like many people I watched the evening news and heard all about the terrible fires and devastation in Russia.  The loss of 25% of the wheat crop was a considerable chunk of the report.  “OK time to take great care in Wheat” was the first thing that went through my mind.  “The great unwashed will be going shopping tomorrow stoked up by the media reports” was the second thought that went through my mind.

True to form Thursday saw the wheat market close limit up as everyone scrambled to climb aboard the bandwagon.  On Thursday night I mentioned to my closest friends that this market could run a lot higher still, but to be careful as such moves end just as spectacularly as they begin.  You never want to consider continuation trades in a parabolic market and nor do you want to start fading them until after they have turned.  In fact unless you have a lot of experience with these types of moves you just don’t want to touch them at all.

So today there was another huge run up in wheat as the last of the desperate buyers emptied the last of their available money into this market chasing the dream that it would continue climbing to the moon.  What the less informed masses fail to grasp is that the move up is only sustainable for so long as they have money to drive it up themselves.

But the minute the buyers run out of money there is nothing left to drive it any further and inadvertently they then become the architects of their own demise.  Sadly I was away today so missed all of this classic saga unfolding.  But I found it telling that the market ran up again early today, almost to limit up, but not quite.  It then traded sideways for many hours just a few cents below limit up.  In other words there was no artificial limit placed on the buying today – the bulls were able to buy everything that they wanted.  In fact they were able to buy so much that they finally exhausted their reserves.  With no more money available to come into the market it duly turned down, put a top in and closed limit DOWN!

Every single person who bought in the last 2 days (i.e. after the big news report) is now not only holding a losing position, but trapped in a losing position.  Once the market was locked limit there was absolutely no way for these people to sell back out.  They were late to the party and are now locked in for the weekend, at least.

Do you think they’ll be sleeping well tonight?  Do you think maybe there will be a pile of “sell market on open” orders being prepared over the weekend?  The market closed at 726 after some poor soul paid as much as 841 just a few hours ago.  Now that looks suspiciously like a brokerage statement that will shortly be framed and hung on the wall next to all the dotcom share certificates!

Lots of trapped new players, is often the recipe for a massive squeeze.  Do you think they’ll get out at 726 when the market opens on Sunday night?  Or does it seem more likely that there will be a huge gap?  It’s going to be ugly for them either way, so the debate now is only one of magnitude.

For us it is just another reminder of some very important lessons:

• How and why markets actually turn
• How the majority will always be on the wrong side at significant turning points
• The media’s role in driving such events
• Why we never want to chase a market, nor touch a market that has gone parabolic (until after it turns)

[As a quick aside for those that use my Behind the Chart technique, take a look at the hourly wheat chart today – a picture perfect short just above 800, with no heat and a straight line move to limit down.  As I said in the webinar the fade trades are always the best ones, they just aren’t as frequent as we would like.]

Disclaimer, risk warning and copyright notice apply to all articles published on this site.

Copyright © Simon Townshend Ltd 2010, all rights reserved