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Futures and Options

10:09 PM
Elaine Kub, DTN grains analyst
Elaine Kub, DTN grains analyst
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Not Fundamental, but Not Technical Either

According to the commodity market fundamentals we were all accustomed to, traditional traders make buying and selling decisions based on what they figured to be a "fair" price for a given commodity.

On that same thought, technical algorithms do not take into account the new-found correlation that is forming between the stock market and the commodity markets. Historically, the stock market was non-correlated or even negatively correlated to the commodity markets. More recently, it has become apparent that the speculative traders currently inhabiting the commodity markets also have primary investments in the stock market. On days when the stock market struggles (as we saw on February 28 when the stock market hit its February low) long-liquidation occurs, adversely affecting the commodity markets. As the stock market falls, speculative investors panic, and to recoup their losses, traders will sell out of profitable positions in commodity markets (driving commodity prices lower) to cover their losses in the stock market. This new market dynamic is surely unaccounted for by most technical algorithms.

When it comes to trading commodity futures, the rules of the game have changed. Traders must remember that they are now trading in uncharted territory. Due to their extreme volatility and new market structure, commodities are an unfriendly place for smaller investors. Those that decide to continue to invest using technical algorithms need to proceed with caution. In order to be successful, smaller traders must be conscious of larger speculative traders and how their actions can affect profitability and trading opportunities.

Elaine Kub is an analyst at DTN, an online provider of real-time commodity market news and information. Elaine's commodity and trading commentary has been featured by the CNBC Street Signs and the Associated Press. For more information please visit www.dtn.com.

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