The U.S. dollar index has screamed higher the past week. I've been bullish the dollar index since August, when it broke out above the May high. If I'm long I have moved my sell stop up to 116.20, basis the December futures. That stop placement is just below the September high. I said in my last newsletter on Oct. 12 that trends in the major currencies tend to last longer than trends in commodities. Thus, the uptrend in the greenback against the major currencies could last for quite some time. However, I am very worried about the specter of central bank intervention causing a violent reaction in the foreign exchange markets, and also the currency futures markets. That was the case in the wake of the September 22 central bank intervention. On October 26, the Euro currency moved to a new low against the U.S. dollar in the foreign exchange market. I don't think central bank intervention will alter the intermediate- to longer-term trend in the dollar. However, the short-term reaction to any central bank intervention could well wipe many traders out of their profitable dollar index long positions. If the dollar index had a liquid options market, I would seriously consider buying a put option to hedge my profit from my straight futures position (see educational feature below). However, the options market for the U.S. dollar index is too thin to effectively trade.

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U.S. Treasury Bonds have produced a solid October rally, basis December futures. This week, prices pushed above the early-September high at 101.02 and have since backed off a bit. However, this should be considered healthy consolidation of the recent good price gains. The recent downside price action relieved an overbought situation that oscillators such as Slow Stochastics were indicating for bonds. The shorter-term moving averages I follow (9- and 18-day) are still bullish. The weekly continuation chart for nearby Treasury bond futures shows prices in a strong uptrend for the entire year 2000. Next resistance on the weekly chart does not show up until the 102.22 area. (See chart below.) The monthly continuation chart for nearby T-bond futures is also bullish, as prices have been trending higher since late 1987.

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S&P 500 futures (basis the December contract) earlier this week made a strong attempt to push above and negate the two-month-old downtrend line on the daily bar chart--but could not get the job one. After last week's big sell off and then the strong rebound, it was important for the bulls to take the next step and negate the downtrend line. Since bulls have so far failed to accomplish this, the rally off the low is nothing more than a correction in a market that is still controlled by the bears. The weekly bar chart for nearby S&P 500 futures still shows prices in a steep shorter-term downtrend. The fact that price advances were rejected by the downtrend line this week increases the odds of a challenge of support at last week's low of 1324.80. At present, my bias is that prices will chop in a sideways fashion in the near term, between the support and resistance levels seen on the chart below.

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N.Y. Sugar on October 26 gapped sharply lower on the daily bar chart, basis the March contract, and in the process formed a V-Top reversal pattern as well as caused other chart damage. This is bad news for market bulls. My sell stop was placed at 10.40 cents a while back, and I was stopped out of this market on Oct. 25. I am a conservative futures trader and will set fairly tight stops. This is one example where a tight sell stop avoided a potentially serious loss. The warning flags in sugar became apparent to me when prices dropped back below the August and September highs and in the process filled the upside gap that was created by the big surge higher on Oct. 10. Thursday's steep price drop in March N.Y. sugar also violated on the downside an uptrend line drawn off the March and September lows on the daily bar chart.

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Corn and soybean futures are presently at price levels many traders consider attractive regarding trading from the long side. I cannot disagree. However, we must remember that timing in trading futures is critical. Let's take a short- and longer-term look at corn and soybeans, and then I'll discuss when the timing may be right to play these markets from the long side.

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Corn futures (basis December) hit a low of 1.85 1/2 in August and then revisited that area in September. Prices then moved to three-and-one-half-month highs in mid-October and have since backed off. Prices are currently hovering above the important psychological support area of $2.00. December corn, basis the daily bar chart, is not showing me any real strength or real weakness. Bulls and bears appear to have come to a short-term stalemate. The longer prices trade in a sideways mode, the more momentum bulls will gain. Reason: This will be considered more "basing" activity--whereby prices trade in a range. The longer prices trade in a range, the more powerful the breakout is likely to be when prices do make that move.

The weekly continuation chart for nearby corn paints a little more positive picture for corn, although still not a bullish one. The chart shows corn futures prices are in a steep two-month-old uptrend. However, there is a gap area at 2.12-2.17 on the weekly chart that will be stiff resistance for the bulls to overcome. The monthly chart for nearby corn futures shows prices trading not that far above historical low levels seen during the past 25 years.

Here's what I need to see happen in the coming weeks (or months) before I will play corn from the long side: I need to see nearby futures push up above the big gap area on the weekly chart, mentioned above. That means a move to the 2.18 area. Then, I need to see prices hold gains at 2.18 and then trade and hold around or above the 2.21 level for a couple of sessions. That would push prices above a resistance area located around 2.20 on the monthly continuation chart for nearby futures. At that point, I'll then examine the nearby daily bar chart, and if it looks bullish, I'll then determine a possible entry point.

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Soybeans are arguably the most popular CBT agricultural futures market for speculators to trade. You get more "bang for your buck" with soybeans, as opposed to corn and wheat. November soybeans are presently trapped in a seven-week-old downtrending channel on the daily bar chart. I have said for quite some time now that I do not believe prices will soundly penetrate the July and August lows around the 4.45 area. However, I'm not a bottom-picker and need to see soybeans show some good price strength before I play the long side. Let's look at the bigger picture in soybeans.

The weekly continuation chart for nearby futures shows prices bottomed out from a long-term downtrend in July of 1999 and have been trading in a sideways and choppy pattern since. A smaller-degree downtrend on the weekly chart has developed (see weekly chart below). The monthly continuation chart for nearby soybean futures shows prices in a downtrend since 1997. However, prices have also traded sideways since hitting the 4.01 bottom in 1999.

Nearby soybean futures prices need to trade above solid resistance at 5.70, basis both the weekly and monthly charts, to turn me very bullish and play the long side. Some of you may say, "Wow! That's another $1.00 of price gains from present levels before you even turn bullish enough to trade the long side! That's right. Here is my reasoning: By looking at the monthly chart for nearby soybean futures, one can see that prices have traded above the 5.70 level the vast majority of the time during the past 25 years. Importantly, one can also see that the really big price moves in soybeans have occurred when prices were trading above 5.70. Furthermore, a look at the monthly chart shows that when prices do push above 5.70, strong rallies have tended to follow. I'm not saying there won't be any long-side trading opportunities in soybeans at levels below 5.70. There certainly may be in the coming weeks and months. However, I like to have the charts stacked solidly in my favor when I initiate trades. A move in nearby soybeans above 5.70 does indeed stack the odds solidly in favor of a profitable long-side trade.

"Patience" and "discipline" are two important words we hear a lot in this fascinating business. The corn and soybean markets are prime examples of traders needing to exercise patience and discipline.

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Orange Juice is one of the futures markets, like lumber, that gets less attention because it's not as actively traded as other commodities, such as corn, soybeans or sugar. However, open interest in the nearby O.J. contracts is adequate enough to trade this market. Veteran New York futures market traders know that O.J. can be a good seasonal trade from the long side in late fall and into winter. Reason: There is always the threat of frost damage to southern U.S. orange groves during this timeframe. However, keep in mind that just establishing a long position in, say, late fall and then "hoping" for a frost in the southern U.S. is not the way to successfully trade orange juice futures. Let's take a look at the short- and longer-term picture for the O.J. futures market, to determine if there may be any trading opportunities in the coming weeks.

The weekly continuation chart for nearby O.J. futures shows prices in a downtrend since September of 1998. The monthly chart shows nearby orange juice futures prices have been in a downtrend since 1990. Prices are currently hovering close to 20-year lows. January orange juice futures have been in a solid downtrend on the daily bar chart since late June. This market is short-term oversold and likely due for at least a modest upside correction. However, I will not be a bottom-picker here.

Some elements are in place for a potential long-side play in O.J. in the coming weeks. With prices close to 20-year lows, I know there is not much more downside left in the market. I know that there is the possibility that a weather scare this winter could send O.J. skyrocketing--especially since prices are close to 20-year lows. But I need the O.J. market to show me some signals of strength before I think about playing the long side.

Here's what I need to see happen in O.J., in order for me to play the long side: First of all, I cannot predict the weather, so any long-side trade in the O.J. market will be based on technical signals and not the "hope" that there is a weather scare. Still, I know that the potential for a weather scare is there and that if it occurs I could reap big profits. I want to see January O.J. reverse the present slide and move up toward 85 cents. That's a long way north from present price levels, but is still below the June highs, basis the January contract. The reason I'm focusing on 85 cents is because the longer-term weekly and monthly charts tell me that the bigger moves in O.J. have occurred when prices have traded above 85 cents. Also, the past 20 years have seen nearby O.J. futures trade above 85 cents during the vast majority of that timeframe. So, if and when nearby O.J. futures push to near or above 85 cents, I'll closely examine the daily chart to consider an entry point on the long side. Stay tuned.

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N.Y. Coffee futures saw a minor spike higher in mid-October that faked the bulls out once again. This market has gained a reputation for bull traps, as prices will surge higher, only to drop off rapidly and set fresh lows. Presently, prices are hovering near a yearly low, basis the December futures contract. The monthly continuation chart for nearby coffee futures shows prices in September set six-year lows, at around 72 cents. Coffee is another market where I don't think there is much more room on the downside. For perspective, nearby coffee futures (the December contract at present) are trading at 78 cents. The past 25 years have seen nearby coffee futures trade at 78 cents or below only in the years 2000, 1994, 1993, 1992, 1991 and 1989. And in four of these years, prices only briefly traded at 78 cents or lower. The years 1992 and 1993 did see a sustained coffee futures price below 78 cents. Indeed, coffee futures are at historically low levels. But that is just one piece of the puzzle we need before a long-side trade should be attempted. Timing is everything when trading futures. The market should show signs of a turnaround and significant strength before I'll think about going long coffee. As long as coffee is trading below $1.00 per pound, I'm not going to get excited about plotting a strategy to trade coffee futures from the long side. Just like orange juice, if and when coffee does challenge my pre-determined resistance level, then I'll closely scrutinize the daily chart for possible entry points on the long side.

My mission is to help you become a more successful trader--by analyzing markets and pointing out to you potentially profitable trades, and (importantly) by providing unique educational features that will move you farther up the ladder of trading success.

One of the most important tenets of successful futures trading is survival. In order to enjoy those winning trades that will make you successful, you must survive the losing trades that all traders encounter. It's not unusual for successful futures traders to have more losing trades than winning trades in any given year. The key is the successful traders' losing trades result in much smaller losses than their winning trades' profit gains.

Surviving the more numerous losing trades in order to catch the fewer big-winner trades requires the use of prudent buy and sell stop placement. However, there are some home-run-type trades (which we all dream about) that may require even more protection for you than stops. If you are in the middle of a potential "home-run" trade and are accruing very nice profits, you may not want to exit the trade because of even more profit potential by staying in the trade. However, you also have a substantial profit in place and don't want to lose it if the market becomes highly volatile--which is many times the case in big "home-run-type" market moves. It is situations like this where the purchase of options on futures can "lock in" trading profits for you--yet allow you to remain in a trade that could result in even more profits.

I'll provide a "hedging with options" example, but first I want to discuss the market conditions that can lead to the use of options to hedge futures trading profits.

I've said the placement of buy and sell stops in your trading plan is very important. However, when market movements become extreme, stops can be far less effective. The gap between bid and ask prices can get so large that a stop level gets bypassed by a large degree. When a market locks limit up or limit down, stops are virtually ineffective.

Indeed, limit price moves in futures markets can be the best and the worst of times for a futures trader. At this time I'd like to share an interesting futures market theory with you.

My good friend, Steve Moore, of Moore Research Center (MRCI) in Eugene, Oregon, pointed out to me many years ago "Howe's Limit Rule," and I want to share it with you.

Robert Howe, a market and technical analyst, suggests that a futures price at the limit of a tradable daily range, once reached, becomes an objective which the market will again test and ultimately exceed, at least briefly, and usually sooner rather than later. Why? A primary function of any market is to explore and discover value. A market artificially interrupted in its pursuit of current value is unsatisfied and leaves critical questions, such as how far and how urgently the market would continue searching for fair "value."

Unlike objectives derived from chart formations and mathematical formulas, which approximate a target range, Howe's Limit Rule identifies precise price targets which can be valuable to both short-term and position traders.

For instance, if a market trades at a "limit up" price: 1. Short-term traders may more confidently buy into any pullback (whether intraday or during subsequent trading days). 2. Traders already long may be encouraged to maintain their positions. 3. Prospective short-sellers may be discouraged from taking immediate action.

Understanding the principles of Howe's Limit Rule, each of the above would expect a decline, if any, to be minor unless and until that limit price is exceeded by at least one tick. However, if after a prolonged trend a limit price is exceeded only briefly and tentatively, a failure that ultimately constitutes a reversal may be imminent (as the market exhibits exhaustion). As a corollary, an unexpected limit move in the direction opposite the prevailing trend can be an early warning of a trend reversal (as everyone changes their minds at the same time).

Finally, an abrupt limit move from out of accumulative or distributive congestion can signal the beginning of a powerful new trend (as everyone tries to go through the same door at the same time).

On the rare occasion when a lead futures contract leaves a traded limit price "hanging" (not exceeded prior to its expiration), that limit price is carried over as a future objective for subsequent lead contracts. As such, it can become a target for intermediate- or long-term trend exhaustion. In other words, the prevailing trend may be maintained and/or a new trend suppressed until that "hanging" limit is exceeded, often creating a double top or double bottom. The lead contract is most cash-connected, and those prices later become significant support/resistance points on weekly/monthly charts. Limits left hanging in deferred contracts are specific to them only and become irrelevant at expiration.

Okay, let's get back to an example of hedging some decent futures profits with options. Let's say a trader established a long position at 7.00 cents in one contract of March 2001 N.Y. sugar futures back in April--just after prices broke out above a resistance area. The trader then sees a nice uptrend that takes prices up to 8.50 cents, but then the market pauses. The trader already has a profit of $1,680 (150 points), but thinks the bull run may not be over. He purchases a put option on March sugar with a strike price of 8.50 cents, for a cost of 45 points, or $504. He has just locked in a profit of $1,176, and he is still in the market and long sugar. If the trader then stayed in the market for the rally that took prices to a high of 10.81 cents in early August, and exited his long position at, say, 10.50 cents, that's another 200 points of gain, or $2,240 more in profit. Thus, the trader pockets a total profit of $3416.

Another point I want to make is that when markets move toward price extremes, you have a double-edge sword. The profit potential is likely the highest during these big price moves, but the high volatility means the market can very quickly turn against you--and your protective stop may not be effective. If you have purchased an option to hedge your profits, you have also limited your potential losses if the market makes a sudden and violent turn against you.

Here are some important caveats about hedging your futures profits with options: Make sure the market you are trading has a "liquid" options market. Some markets, such as lumber or the U.S. dollar index, have adequate enough open interest to trade straight futures, but their futures options are "thin" and not a good candidate for hedging profits. Also, you want to make sure you have a substantial profit accrued before hedging your winning position. You probably don't want to take a bigger bite out of your trading profits by purchasing an option than you have profit left after purchasing that option.

That's it for now. Next time we'll examine another trading issue you can employ on the road to becoming a successful trader.

Disclaimer: There is a risk of financial loss in futures and options trading. Futures trading is neither easy nor an easy way to make money. It takes hard work to have success. Please use sound money management when trading futures. Past performance is not necessarily indicative of future results. Nothing in this newsletter is intended to be a trading recommendation for you to buy or sell futures or options. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed. Readers are solely responsible for how they use the information in this newsletter.