There are two markets on which I will always comment in my U.S. markets newsletter: S&P 500 futures and U.S. Treasury bond futures. Reason: These two markets are the most popular and liquid U.S. markets for speculators to trade.

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S&P 500 Futures: Veteran traders know the month of October has a history of not being a good month to trade the stock market or stock index futures from the long side. This first October of the new millennium has turned ugly if you're a bull. Severe chart damage has been inflicted upon this market—both on the daily chart and on the weekly continuation chart for nearby futures. December S&P 500 futures prices were pushed to a new 12-month low on October 12. Since early September, this market has been in a steep slide that has only accelerated. Importantly, prices have broken out strongly on the downside of a broad trading channel that had contained prices since late spring. On the weekly continuation chart for nearby S&P 500 futures (see below), note that a 12-month-old uptrend line has been soundly penetrated on the downside. Next support on the downside, basis the weekly chart, is in a wide zone between 1345 and 1293. This is a strong support zone and the bears will have to work hard to push prices below it. Fundamentally, unrest in the Middle East has spooked the stock market. The terrorist attack on the U.S. Navy destroyer on Oct. 12 only added to market jitters. Even though these world events are certainly unsettling to all, financial and stock market traders tend to over-react to these types of events. Don't be surprised if the stock indexes and the stock market in general stage at least a modest rebound in the near term.

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U.S. T-bonds: September was not a good month for bond market bulls. However, prices have been working higher after the steep decline in mid-September. Two weeks ago, a potential bear flag was negated by the recent upside push to a four-week high on October 12. Bulls and bears now appear to be on a level playing field, on a short-term basis. Longer term, the monthly continuation chart for nearby T-bond futures shows prices in a solid uptrend during the year 2000. On the weekly continuation chart for nearby futures, prices are also in a solid uptrend for this year. I look for the bulls and bears to duke it out and keep prices in a trading range between 97.16 (the September low) and 101.02 (the September high) for at least the near term. One thing to watch in the bond market the next few weeks: If stocks continue to get hammered there could well be a "flight to quality" into U.S. bonds. If that does occur, the bond market bulls could be off to the races again.

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Lumber may be a long-side play in the not-too-distant future. Lumber futures are a smaller and often overlooked market by U.S. futures traders. However, this market is liquid enough (open interest is adequate) to trade. If you look at the monthly continuation chart for nearby lumber futures (see below), you'll notice that for the past 10 years this market is chock full of V-reversal patterns. What this means is the market is trending more of the time than it chops sideways. Thus, if you can catch one of those trends and ride it for a while, there is the potential to secure some good trading profits. However, you just can't look at the monthly chart. You need to look at the daily chart to determine when a prudent time would be to enter on the long side. Those of you who know my trading philosophies know I usually don't pick bottoms or tops. So, I want to see lumber show me some strength on the daily chart before I step in with a long position. If you look at the daily bar chart for January lumber futures (below), you'll see that this market is in a long-term downtrending channel. I need to see this downtrend channel penetrated on the upside before I can even think about playing the long side. That means a move above resistance at the $259 level. I'll also watch the popular Moving Average Convergence Divergence (MACD) indicator. If the MACD turns positive, and if January lumber futures punch up through the downtrend line and resistance at $259—and can sustain some follow-through strength the next trading day, then I'll want to play the long side in lumber. Like most trades I make, I would set a tight sell stop in January lumber, likely around the $245 area. My initial upside objective would be at least a move to $300. And if prices pushed above $280, then I would use a trailing stop about 10% below the market price—and try to place the trailing stop just below a support level. Keep in mind that as of this writing the November lumber contract is still the most active. However, I suspect any trading opportunity in lumber would be in the January contract, at the earliest.

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Is the U.S. Dollar Index bull running out of steam? I have been bullish the U.S. dollar index since its late-August breakout above stiff resistance just below the 112 area, basis the December contract. At that time the daily, weekly and monthly charts for the dollar index all looked bullish. The unexpected central bank intervention on Sept. 22 shook (or I should say stopped) many bulls right out of the market—only to see prices work their way back and regain most of the losses suffered that fateful Friday. As a trader, it's frustrating to see this type of artificial—and apparently unsuccessful— manipulation of the foreign exchange market by government officials. The intervention briefly gyrated prices to the point that many traders were forced out of long positions that had been winners up until that point. What now for the dollar index? Well, the weekly and monthly continuation charts for nearby dollar index futures are still bullish. The daily chart (see below) shows a three-week old uptrend under way since the Sept. 22 sell off. However, there is one worrisome factor for the bulls at present: The powerful Directional Movement Index (DMI) indicates the uptrend in the dollar index has lost its power. The ADX line is trading below 30, which indicates a non-trending market. Still, this bull run in the dollar index may not be over. If prices can work back above the September high of 116.45 (basis December futures) and then sustain the gains above that price for one trading session, then I will want to play the long side of the dollar index again. Here's why: I have followed the fundamentals of the foreign exchange market for many years. I know that trends in the currencies—and especially in the dollar—usually last much longer than trends in commodities. If the dollar index breaks out above the September high, the index could trend higher for quite some time to come. Remember, though, that the dollar index must first show me it has the strength to trade above the September high, before I play the long side. Once again, I would place a fairly tight stop once I establish my long position in the dollar index. I just don't like to say with losing trades very long. Yes, I'll get stopped out on occasion—only to have prices pop right back in my favor the next trading session or two. However, I won't get caught in a "hope" mode—that is, "hoping" the market moves back in my favor before losses get insurmountable.

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N.Y. Gold: I get many emails from traders regarding the gold market. So, I will keep a closer eye on this commodity in my newsletters. I've been bearish the gold market for quite some time. However, I don't want to trade it from the short side now because prices are near 20-year lows and this market is short-term oversold. And since I'm usually not a bottom-picker, I don't want to play the long side at present price levels, either. However, there are some signs of technical strength in the gold market. A double-bottom reversal pattern may well be forming in the December COMEX contract. For that double-bottom pattern to be confirmed, prices would have to push above the September high of $282.50. What will turn me neutral to bullish gold? First, I need to see this market show me some solid strength. The first sign of solid strength would be if prices push above $285, basis the December COMEX contract. That would turn me neutral. I'd turn outright bullish on gold if prices push above the psychological $300 level (see chart below). Many of you might ask, "How could you still be bullish after gold had already spurted over $25 per ounce?" Here's why: Historically, gold traded above $300 from 1986 through most of 1997. If gold has the strength to push back above $300, then there could be a lot more upside in the market beyond that level. Gold traded at over $800 per ounce in 1980, was over $500 in 1987, and as recently as 1996 traded over $400 per ounce.

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N.Y. Cocoa: Similar to the gold market, I get a lot of questions from traders wanting to pick a bottom in cocoa. Indeed, a look at the monthly bar chart for nearby cocoa futures shows this market in a two-year-old swoon that has taken prices from $1,700 to down below $800 a ton. While the monthly bar chart for cocoa is by no means bullish, it does look like the steep downtrend has ended and prices just may be basing at present. The daily chart for New York December cocoa futures shows a double-bottom reversal pattern playing out. Also, a potential bull flag could be developing on a short-term basis. These are positive first steps for the cocoa bulls to get back in the ballgame. However, before I want to play the long side in cocoa, I need to see the downtrend line on the daily bar chart-drawn off the March and June highs-soundly penetrated on the upside. That means a move above the $900 level (see chart below).

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Soybeans: This is a very popular agricultural futures contract for speculators to trade. You get more "bang for your buck" from soybeans, as opposed to corn and wheat. An impressive upmove in August charged the soybean bulls. However, the month of September saw the rally fizzle and prices turn down. Bears have regained the upper hand in beans. Will prices re-test and break below the July and August lows around $4.45, basis the November contract? I don't think so. Most of the bearish news for soybeans is already in the market-namely the huge U.S. crop. Farmer selling in the cash market as harvest progresses will cap upside potential. This fall, I see nearby soybeans trading in a range between the summertime lows (4.45) and the early-September high (5.15). However, the risk this fall is for an upside move above the September high of 5.15.

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Kansas City Wheat: Wow! This market does not get the attention of its Chicago wheat counterpart, but the bull is coming alive in K.C. wheat (see chart below). Since mid-September this market has shot around 30 cents per bushel higher, including strong gap-higher sessions on the daily bar chart. A nice head-and-shoulders bottom reversal pattern played out on the daily bar chart for December futures. Now, the next upside objective for the bulls is the June high of 3.40. This market is overbought at present, so don't be surprised to see a downside correction in the near term.

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Corn: A bullish USDA report on Oct. 12 prompted a strong gap-higher trade on the daily bar chart for December futures. This move higher also propelled prices well above a three-month-old "basing" area on the daily chart. This type of technical trading activity is what the bulls have been wanting to see. Still, I can't get excited about playing the long side in corn amid harvest pressure in the cash corn market. The next upside objective in Dec. corn is resistance around the 2.18 area.

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N.Y. Sugar: This market is very interesting. In mid-September, it looked like the bulls were on the ropes and ready to throw in the towel. But then prices rebounded off the low of around 9 cents and this week have pushed to new high ground for the year, basis the March contract. Bulls are indeed back in charge. I do want to play the long side in sugar right now. Reason: Prices pushed to a new high and then showed follow-through strength the next trading session. Also, recent history suggests sugar futures prices, at present, are not that lofty. The past 10 years have seen sugar futures prices trade above 10 cents the vast majority of that timeframe. Since March sugar has showed me the strength to rebound smartly and to push above the August high, there could well be a few more cents on the upside. Sugar's move this week to above the August high also pushed above a six-week-old congestion area that developed during August and the first half of September. This is a very good example of one of my favorite trading "set-ups:" Buy into strength after an upside breakout from a congestion area. You'll hear this from me a lot: I'll set a tight sell stop-right around the 10.50-cent area, which is just below a support area.

Those of you who have followed my work for some time know that I take a "toolbox" approach to analyzing and trading markets. The more technical and analytical tools I have in my trading toolbox at my disposal, the better my chances for success in trading. You should take the same approach. One of my favorite tools is moving averages. First, let me give you an explanation of moving averages, and then I'll tell you how I use them.

Moving averages are one of the most commonly used technical tools. In a simple moving average, the mathematical median of the underlying price is calculated over an observation period. Prices (usually closing prices) over this period are added and then divided by the total number of time periods. Every day of the observation period is given the same weighting in simple moving averages. Some moving averages give greater weight to certain prices within the observation period. These are called exponential or weighted moving averages. In this educational feature, I'll only discuss simple moving averages.

The length of time (the number of bars) calculated in a moving average is very important. Moving averages with shorter time periods normally fluctuate and are likely to give more trading signals. Slower moving averages use longer time periods and display a smoother moving average. The slower averages, however, may be too slow to enable you to establish a long or short position effectively.

Moving averages follow the trend while smoothing the price movement. The simple moving average is most commonly combined with other simple moving averages to indicate buy and sell signals. Some traders use three moving averages. Their lengths typically consist of short, intermediate, and long-term moving averages. A commonly used system in futures trading is 4-, 9-, and 18-period moving averages. Keep in mind a time interval may be ticks, minutes, days, weeks, or even months. Typically, however, moving averages are used in the shorter time periods, and not on the longer-term weekly and monthly bar charts.

The normal moving average "crossover" buy/sell signals are as follows: A buy signal is produced when the shorter-term average crosses from below to above the longer-term average. Conversely, a sell signal is issued when the shorter-term average crosses from above to below the longer-term average.

Another trading approach is to use closing prices with the moving averages. When the closing price is above the moving average, maintain a long position. If the closing price falls below the moving average, liquidate any long position and establish a short position.

Here is the important caveat about using moving averages when trading futures markets: They do not work well in choppy or non-trending markets. You can develop a severe case of whiplash using moving averages in choppy, sideways markets. Conversely, in trending markets, moving averages can work very well.

In futures markets, my favorite moving averages are the 9- and 18-day. I have also used the 4-, 9- and 18-day moving averages on occasion.

When looking at a daily bar chart, you can plot different moving averages (provided you have the proper charting software) and immediately see if they have worked well at providing buy and sell signals during the past few months of price history on the chart. I will point out moving averages to my readers when they have been effective in a given market. If I see that moving averages have not been effective in a given market, I'll likely ignore them.

I said I like the 9-day and 18-day moving averages for futures markets. For individual stocks, I have used (and other successful trading veterans have told me they use) the 100-day moving average to determine if a stock is bullish or bearish. If the stock is above the 100-day moving average, it is bullish. If the stock is below the 100-day moving average, it is bearish. I also use the 100-day moving average to gauge the health of stock index futures markets.

One more bit of sage advice: A respected veteran market watcher told me the "commodity funds" (the big trading funds that many times seem to dominate futures market trading) follow the 40-day moving average very closely. Thus, if you see a market that is getting ready to cross above or below the 40-day moving average, it just may be that the funds could become more active.

That's it for this time. Next issue, we'll focus on another trading tool.

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.