Coffee And Platinum: Diagrams Of Two False Buy Signals
The purpose of this review is to show prospective clients how we approach markets once a buy signal has been generated, and it turns out to be false. False signals occur with a certain amount of regularity, regardless of the methodology used to determine them. However, false signals occur far less frequently using OIA protocols, which have been refined over the course of several years. In essence, when a buy/sell signal is generated, it typically represents an extension of a move that may have begun days or weeks prior. Thus, in the case of coffee and platinum, once buy signals were generated, the two markets by our definition were significantly over extended and ready to correct. We then monitored them for mean reversion within OIA's 3 day protocol for a correction. It is within the 3 day corrective period that we determine specific buy/sell points and an exit if the correction extends beyond 3 days. If the signal turns out to be false, and positions have been recommended, the loss will be negligible because the position was initiated at the low (buying) or high (selling) parameter of the 3 day trading period.
On May 8, coffee generated a short-term buy signal, and by May 20, coffee generated a short-term sell signal. Any client that purchased call options on May 14 and 15 (as we recommended) when futures were trading at $1.40 had minor losses when the report of May 16 indicated that bullish positions including call options were to be liquidated
In the reports of May 16 and 17, we stated that coffee would generate a short-term sell signal if it did not trade above 1.3885. This first occurred on May 20 when OIA announced that coffee had generated a short-term sell signal. Since making that call, coffee has fallen to $1.1710 on June 20, 2013, which is 24.95 cents below the May 16 close (1.4205).
The following extracts are from reports as written on the dates indicated.
From the May 8 report:
"On May 8, July coffee generated a short-term buy signal."
"July coffee gained 1.45 cents on volume of 26,519 contracts. Open interest increased by a substantial 1,160 contracts, which relative to volume is approximately 70% above average, meaning that new longs were aggressively entering the market and pushing coffee prices higher. As this report is being compiled, July coffee is trading higher on the day and will likely close at a new high for the move. As is usually the case after the generation of a buy signal, a pullback lasting 1-2 and possibly 3 days is likely. On May 9, coffee has made a new high for the move at $1.4875, which is the highest price since March 5 when it made a high of 1.4995. Do not chase the rally."
From the May 13 report:
"We want to see the market pull back approximately 2 cents before recommending the initiation of bullish positions. We recommend the use of options on futures, which allows speculators to weather the occasional sharp move lower. Also, using options allows speculators to better control risk by calibrating this based upon the strike price."
From the May 14 report:
"July coffee has pulled back 3.20 cents and has made a new low for the move at 1.4005, which is at its 50 day moving average of 1.4020. The pullback is healthy and coffee remains on a short-term buy signal, but an intermediate term sell signal. We recommend the use of call options to initiate bullish positions, which allows speculators to adjust their risk based upon the option's strike price."
From the May 15 report:
"As this report is being compiled on May 16, coffee has made a low of 1.3825, but has rallied to 1.4025. Originally we thought coffee would move to the 1.42 level, but the market moved to the lower end of the trading range, however coffee remains on a short-term buy signal, but an intermediate term sell signal. In our view, the low on May 16 is at, or near to the reaction low made from the May 10 high of 1.4880. We recommend that clients purchase call options, which will give them the flexibility of managing their risk based upon their choice of option strikes."
From the May 16 report:
"For the past 3 days, coffee has declined 5.90 cents while open interest has declined by 434 contracts. This is bullish congruent price and open interest action. Despite this, the market has fallen more than we anticipated, and as this report is being compiled on May 17, July coffee is trading 1.85 cents lower and has made a low of 1.3755 on very light volume. We do not like the way coffee is trading and are reversing our buy recommendation, and now advise clients to move to the sidelines. For those who are long call options, we recommend these be liquidated. For coffee to generate a short-term sell signal, the high of the day must be below $1.3885. Stand aside."
From the May 17 report:
"July coffee lost 2.95 cents on volume of 16,931 contracts. Open interest increased on the decline by 663 contracts, which relative to volume is approximately 55% above average. On May 16, we reversed our bullish recommendation and advised clients to liquidate bullish positions and move to the sidelines. Furthermore, we stated that coffee would generate a short-term sell signal if the high of the day was below $1.3885. As this report is being compiled, the high of the day has been 1.3690, which is Friday's closing price. Stand aside."
From the May 20 report:
"On May 20, July coffee generated a short-term sell signal, which reverses the short-term buy signal generated on May 8. Coffee remains an intermediate term sell signal as well."
"This will be our last report coffee until we see a compelling reason to be involved in the market. Since reversing our position as we stated in the May 16 report, coffee has fallen an additional 6.45 cents through May 21. We feel uncomfortable approaching the market from the short side, especially since the freeze season is coming up. Stand aside."
We are presenting extracts from reports when platinum generated what turned out to be a false buy signal on June 5 until the sell signal was generated on June 17. We have reprinted the relevant reports from June 5, June 6, June 7, June 10, June 12, June 14 and June 17. As reports below indicate, even though platinum had generated a short-term buy signal, we did not recommended a position because the market did not perform in accordance with our 3 day corrective protocol.
"On June 5, July platinum generated a short-term buy signal, but remains on an intermediate term sell signal."
"July platinum gained $19.50 on volume of 13,504 contracts. Open interest increased by a massive 672 contracts, which relative to volume is approximately 100% above average. As this report is being compiled on June 6, July platinum is trading $16.20 higher and has made a new high for the move at $1534.50, which is the highest price since April 11 when July platinum made a high of $1535.20. As is usually the case after the generation of a buy signal, the market has a pullback lasting 1-2 and possibly 3 days. Do not chase the rally."
In the June 6 report, we again advise caution with respect to initiating new long positions.
From the June 6 report:
"We should see at least one more day of a decline before contemplating bullish positions. Our reticence about platinum is that the equity market is in a corrective mode, and if the correction becomes severe, platinum will likely setback more than usual. Therefore, we advise caution on initiating new long positions."
From the June 7 report:
"July platinum lost $26.70 on volume of 16,462 contracts. Open interest declined by 406 contracts, which relative to volume is average. In the June 5 report, we stated: "As is usually the case after the generation of a buy signal, the market has a pullback lasting 1-2 and possibly 3 days. Do not chase the rally." Since generating the short-term buy signal, platinum had a pullback on June 7 and another one on June 10. Depending upon the currency and equity markets, conceivably a third pullback could occur. The low on June 10 has been $1487.30, and July platinum is currently trading $5.30 higher."
From the June 10 report:
"In our report of June 7, we stated that an additional pullback for third day could occur. However, our concern is that the pullback on June 11 is significantly greater on a percentage basis than gold or silver, which have been the weak sisters. No positions have been recommended as yet because of the anticipated multi-day pullback. If the equity market continues to move lower, it will likely drag platinum and the precious metals lower as well."
From the June 12 report:
"We have been wary of the move in platinum after it did not conform to the usual pullback scenario. In the June 10 report (below), we expressed our trepidation about the trading of platinum. Platinum appears to be destined to reverse the short-term buy signal generated on June 5."
From the June 14 report:
"Platinum will generate a short-term sell signal on June 17, which reverses the short-term buy signal generated on June 5. As it turned out, the buy signal on June 5 was false. However, our protocol dictates that a pullback of 1-3 days was in the offing and therefore positions were not recommended. By the third day, it was apparent the buy signal was suspect and we informed readers about this."
From the June 17 report:
"Platinum: On June 17, July platinum generated a short-term sell signal, which reverses the short-term buy signal generated on June 5. Platinum remains on an intermediate term sell signal."
Since the generation of the short-term sell signal on June 17, platinum has fallen from its close of $1434.80 on June 17, 2013 to close at 1307.40 on June 26, 2013.
When OIA's protocol generates short and intermediate term signals, the market by OIA's definition is (1) over bought/sold and (2) a correction of this condition is likely to take place imminently. The benefit to clients is they have an additional frame of reference to assist them with their in-house analytics. If clients buy breakouts, they obtain an edge by utlilizing the 3 day corrective protocol to determine entry points, which decreases the likelihood of getting caught in a major pullback. Regardless, of how markets trade after the generation of buy/sell signals, clients have the benefit of OIA's price, volume and open interest analysis to know whether the move is likely to be sustained. If markets continue to move higher/lower (without correcting) after the generation of buy/sell signal(s), our underlying philosophy remains the same, only the timing of the pullback changes.