From the December 01, 2011 issue of Futures Magazine • Subscribe!

Tech Talk: Cocoa technicals

In the classic "Techniques a of Professional Commodity Chart Analyst," Arthur Sklarew suggests that if you want the real technical story on a commodity, you look at the weekly chart. After 26 years of trading, we’ve come to the conclusion that he may have something. Daily charts often can be skewed by daily news events or other anomalies that often correct themselves long before making a dent on the weekly chart. Weeklies give you the big picture.

Some technical indicators are more useful than others. Each trader has his favorites. None work all the time. This makes them a fallible instrument when calculating price projections.

However, you can get more consistency out of technical indicators if you look for simultaneous confirmations from two or more. This approach can be made even more effective if these congruent buy and sell signals have predicted moves reliably in the past.

Now, use these two complementary indicators on a weekly chart and Bingo! You have a pretty good shot at calling the longer term direction of a market.

A perfect example right now is in cocoa. Using Bollinger Bands on weekly cocoa charts would have been moderately effective in trading cocoa over the last four years. A cut above the upper or lower band is a good indicator that the going trend will reverse. But at the times it didn’t work, it could have cost you.

However, combining a slow stochastic with the Bollinger Band produced much more consistent results. Taking only the Bollinger Band buy and sell signals that are confirmed by an overbought or oversold stochastic crossover proves to be a stunningly accurate predictor of direction.

Mid-November of 2011 finds cocoa in a similar set-up. With Bollinger Bands cut in October and stochastic crossover confirmation in November, cocoa looks like a buy for position traders this month.

James Cordier & Michael Gross are authors of "The Complete Guide to Option Selling" 2nd Edition (McGraw-Hill 2009). They are co-portfolio managers of OptionSellers.com, an investment firm that offers managed option selling portfolios for high net-worth investors.

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