Potentially good commodity futures trades often disguise themselves.
They make you feel you're looking over the edge from the roof of a tall building with no railing.
To experience this feeling, try buying a panic price spike in progress.
I'll give you a real world example.
Recently, the S&P 500 futures contract market was down in the morning.
The A-D line (the stock market advance-decline line) was a bearish negative 2:1.
The market was slowly trending lower in lazy fashion.
The cycles had a normal translation, indicating this was not a robust bear (down) move.
The cycles also had normal lengths, suggesting a neutral environment.
In addition, the volume patterns were starting to show bullishness and the cycle structure was getting more bullish.
Yet, the futures market was creeping lower.
With the bearish A-D line and lower lows in price action, there was no doubt a huge bearish group of traders were on the gravy train short.
They were waiting for the big slam down to take profits.
I was talking with a commodity futures broker friend who was doing a good job of selling the rallies and covering at the breaks.
I told him I was starting to see subtle signs of a big turn that could last for four hours into 4:30PM, the close.
I explained my reasons for the market's vulnerability.
He took my advice by not trying a new short, but he wouldn't reverse and go long.
When I heard his "shaky voice" telling me he couldn't take the long trade, I told him his reaction was the final piece I needed to finish the puzzle.
He was my "shaky voice" indicator.
Bear in mind that taking a trade against the A-D line when the futures contract market is trending lower will make you a loser over time.
It's not a habit you want to get into.
But when other indications line up that suggest a market turn, then it pays to be alert.
These kinds of vulnerable situations can be explosive and make the risk/reward of the trade worthwhile.
("pot odds") This is like the "pot odds" when playing poker.
Sometimes the potential reward is so great, it's worth taking a shot.
Because over a long run of these type trades, probability will play out in your favor.
But this is only when there are overwhelming indications.
Otherwise, the odds are against you in the long run.
You rarely want to trade against the trend.
So anyway, after my buddy got out, the futures market started to persistently creep higher over a ten-minute period.
I knew at that point the short traders would start covering.
I would have.
Within three minutes, the S&P futures contract ran up five full points - totally out of character.
That's a big move for day traders.
It formed a spike and sold off a few points immediately.
But this was just the beginning of an up-move lasting for the rest of the day.
It all began in a subtle way with lazy bottoms and confident short traders.
But it ended with demoralized, beat-up traders wondering what happened.
Part Three of Three,Next! There is substantial risk of loss trading futures and options and may not be suitable for all types of investors.
Only risk capital should be used.