By: Carley Garner of DeCarley Trading

The most basic rule of trading is simple; buy low and sell high and therefore we, at DeCarley Trading, are on a constant search for markets that are trading at a dramatic discount or premium. However, understanding the concept and actually practicing it in reality are two different things. Fortunately, Barchart.com has found a way to quantify how cheap or expensive a particular futures market is based on the year to date high and low.

The "All Futures Highs/Lows" page featured on Barchart.com displays the year-to-date high and low of each commodity futures contract. In addition, the tool offers traders quick insight into deviation of the current price from its relative high or low price thus far in the year. As you can imagine, this can be a valuable tool in determining which markets are possibly over or under valued.

Although we will be focusing on the futures markets, it is important to note that Barchart.com offers identical annual stats on 31 of the most commonly traded Forex currency pairs ("Forex Highs/Lows" page). In addition, the site displays high/low data on alternative time frames including 5-day, 1-month, 3-month and 12-month.

For example, by mid-October 2010, the U.S. Dollar had retraced nearly all of the progress made earlier in the year. A trader interested in a bullish play on the greenback might have simplified the research process by visiting the futures year to date high/low page on Barchart.com.

Although commodities sometimes see prices double, triple...or more in the span of a year, the financial markets rarely experience that type of volatility. Obviously, a 10% move from high to low doesn't constitute a buy signal but it should be a red flag for traders to begin looking for the possibility of a market reversal, or at least a corrective bounce. Of course, the period of the move (weeks vs. months) also plays a big role in deciding whether the market might have gone too far too fast. Scanning the page, it is easy to see each of the currencies paired against the dollar are trading well off the annual lows and only minimally off the year-to-date highs.

Not only does the Barchart.com All Futures Highs/Lows help traders determine which markets might be at or near attractive buying or selling levels, it provides some insight into what the overall risk might be. Naturally, just because a futures contract is trading at or near the "cheapest" level all year doesn't mean it can't get cheaper. Likewise, there is nothing that says it can't dip dramatically below the year-to-date lows; nonetheless, it provides a sense of the "big picture" enabling traders to determine if the risk justifies the potential reward.

Technical View

In addition to annual highs and lows, Barchart.com provides its visitors with easy to use and access statistics on the market technicals. For instance, a trader can easily determine the vital statistics of each futures contract by toggling to the "Technical View" on the "All Futures Highs/Lows" page.

A column with the heading "Opinion" provides viewers with a mathematical interpretation of a combination of 13 of the most popular computer-generated oscillators. Knowing all technical indicators and oscillators portray where the market has been, not necessarily where it is going, it is possible to easily quantify the degree to which a market is technically overbought or oversold. Likewise, it can be helpful in pointing out possible early trends. Because the "Opinion" figure is based on several oscillators, it is somewhat of a diversified indicator and might lead to less false signals.

For example, readings of 80% or more in the "Opinion" column might indicate a maturing trend and suggest traders lighten their exposure in these markets. On the other hand, a reading in the 20% or lower range might identify the beginning of a trend.

You might have discovered the trend is only your friend...until it ends. In late October of 2010, stock index futures had experienced an impressive two-month rally that seemed to defy gravity. Panicked investors chasing missed performance likely sparked some of the buying along with bearish traders being forced out of short positions; nonetheless, the market was potentially overheated. Although, any market can remain overbought for a considerable amount of time, don't forget the quip, "markets can stay irrational longer than most can stay solvent," it isn't wise to assume it will continue to move higher without a pullback.

Because Barchart.com's "Opinion" reading is a conglomerate view of 13 indicators, which are all a mathematical account of what has already happened, if the consensus is an overwhelming buy the trend has likely already run its course. In our view, an "Opinion" reading of 96% in the S&P 500 futures suggests that most of the buyers are in. Accordingly, bullish traders might look to protect profits by trailing stops, lightening their holdings or even selling calls and buying puts to hedge their exposure; while sidelined bulls should be extremely cautious if entering fresh long positions. On the other hand, bearish traders should recognize that, despite the trend, the market might be vulnerable to corrective action.

On the other hand, a newly budding trend might be attractive to position and swing traders. For instance, in late October 2010, the crude oil price had retraced some of its recent gains and appeared to be pressing up against trend-line support. Naturally, a trader wouldn't want to blindly buy into a market that might or might not hold support, but with the help of the "Opinion" feature on Barchart.com it might be possible to confirm such suspicions.

DeCarley Trading believes the combination of basic technical trend lines, support and resistance, along with a diversified oscillator such as the "Opinion" reading could help to reduce false signals and the natural human temptation to be overweighted risk in an overheated market.

Performance

The Performance tab located on the Barchart.com "Futures Highs/Lows" page provides traders an all-in-one source of information on the year-to-date performance for any given commodity futures contract. There are also stats on the 1-month, 3-month and 1-year performance of each futures price.

This can be extremely helpful to traders, in that it provides them with the overall picture of the price action in each market. Without this tool, it is easy for traders to lose themselves in the short-term fluctuations. After all, it is likely much easier to predict what prices might do in the next several months as opposed to correctly speculating on what could happen in the next few trading sessions.

Conclusion

DeCarley Trading tends to be an advocate of option trading; specifically selling options or option spreads. We have found the above features offered on Barchart.com to be extremely helpful in determining where attractive opportunities might be for short option traders.

In particular, it is critical that option sellers establish positions in markets in which volatility or sentiment is at an extreme. Doing so often creates expensive option premium, and therefore potentially attractive opportunities for short option trading. Being aware of maturing trends is important, in that it could translate into overpriced options in the direction of the trend and underpriced in counter-trend options and Barchart.com's "Futures High/Low" is a perfect place to begin researching.

Carley Garner
Senior Analyst
DeCarley Trading

www.DeCarleyTrading.com

Carley Garner is the Senior Analyst for DeCarley Trading LLC where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription visit www.DeCarleyTrading.com. Her books, "A Trader's First Book on Commodities" and "Commodity Options," were published by FT Press.

*There is substantial risk in trading options and futures. It is not suitable for everyone.