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92-ICT Mentorship Core Content - Month 10 - Premium Vs Carrying Charge Market

Last modified by Drunk Monkey on 2022-10-18 12:03
1 00:00:00,690 --> 00:00:10,170 ICT: Welcome back, folks. Again, we're talking about commodity trading. And it's important that I remind you to read the disclaimers here. And I am not a
2 00:00:10,170 --> 00:00:17,700 commodity trade advisor, I'm not licensed to give trade advice. Everything that's mentioned in these topics referring to commodities are specifically to be
3 00:00:17,700 --> 00:00:31,740 viewed as paper trades only. Okay, folks, the June 2017, ICT mentorship, ICT commodity trading lesson for premium versus carrying charge markets. And this is
4 00:00:31,740 --> 00:00:44,190 going to provide you an x ray view of institutional order flow. Okay, when we look at commodities, one of the best resources you have at your fingertips, and
5 00:00:44,190 --> 00:00:54,660 for free, is on bar chart.com. And this is what you'll see generally when you click on a commodity, and it'll pull up the contract delivery months that it's
6 00:00:54,660 --> 00:01:04,860 available. And we find that by going to select the commodity tab over here, and you scroll down, and you'll find whatever commodity you want to do your analysis
7 00:01:04,860 --> 00:01:15,750 on. One of the things you want to do periodically as a commodity trader is once every two to three weeks, you want to be looking for markets that are developing
8 00:01:15,750 --> 00:01:23,550 a premium. Okay, it used to be when I first started as a trader, commodities would be listed in the newspaper like Wall Street Journal and Investor's
9 00:01:23,550 --> 00:01:33,270 Business Daily, not that they're not listed now. But that's where I would usually scan, I would look for a premium or lack of premium in the delivery
10 00:01:33,270 --> 00:01:42,420 months. And we're looking at cotton here. And you can see that all the months that are available for trading for this particular commodity are listed on bar
11 00:01:42,420 --> 00:01:44,970 charts. Website.
12 00:01:50,520 --> 00:02:00,960 Classically, what you'll see, when we pull up, for instance, soybeans, and we're going to assume that the column it shows last here, that's going to represent
13 00:02:00,960 --> 00:02:08,760 the closing price. Now obviously, at the time of this recording, I was getting prices, and they may not be representative of closing prices. So just for
14 00:02:08,760 --> 00:02:17,190 disclosure sake. But we're going to assume for a moment that we were looking at the market after they closed and we look at the closing price or in this case,
15 00:02:17,190 --> 00:02:27,750 the last. And generally if there's a cash market that can be seen or commodity, they'll listed first on bar chart bar chart.com. And that'll be at the top of
16 00:02:27,750 --> 00:02:38,340 the list. And then immediately below that you'll see the first contract delivery month, or what is referred to as the nearby contract. That immediate contract
17 00:02:38,340 --> 00:02:48,690 month, right after the nearby is always referred to as the next month out. So we want to be looking at the nearby in the next month out always okay in contrast
18 00:02:48,690 --> 00:02:57,900 to whether there is a premium, when there is no premium, we have what is referred to as a carrying charge market. Now carrying charge market is simply
19 00:02:58,260 --> 00:03:12,420 today's price viewed in the nearby contract. If today's price is 940 On the July contract 2017. Soybeans, we could see in August, the next month out there should
20 00:03:12,420 --> 00:03:25,350 be an increase in that premium or closing price. And we see it here. So in July 2017, soybeans, closing price would be representative of 940. In August, its
21 00:03:25,350 --> 00:03:35,790 closing price would be representative of 943 and four tenths. So we're seeing an increase and then the next month out. Further out in November, we can see the
22 00:03:35,790 --> 00:03:46,980 dip closing price is 945. And then in January of 2018, it's 952. So this is a typical carrying charge market. Nothing fancy about it doesn't mean that we
23 00:03:46,980 --> 00:03:57,270 can't find bull bull markets in an environment like this. It just means that the likelihood of a parabolic move or a rapid increase, aggressive repricing of the
24 00:03:57,270 --> 00:04:10,110 commodity is far less likely to occur than that if it had a premium. Now looking at a market that has a premium in it, we're looking at the feeder cattle here,
25 00:04:10,290 --> 00:04:22,260 again, bar chart comm.com, we can see the cash market listed first. And the nearby contract at the time of this presentation is August 2017. It's feeder
26 00:04:22,260 --> 00:04:35,460 cattle. And its closing price if it were closing prices would be 154 point 80. And the next month out would be September 2017 feeder cattle with its price of
27 00:04:35,820 --> 00:04:48,840 150 4.125. So the nearby contract is selling at a higher price not much but it's selling at a higher price. So therefore we're premium. Now, the way you look for
28 00:04:48,870 --> 00:04:58,110 whether there's a strong premium or a really significant premium, if you want to go out to the next month beyond the next month out so now we're gonna look at
29 00:04:58,110 --> 00:05:09,960 the next few months. So for all Yes, yes, there is a premium based on the price that seen in September. But in October, we have it cheaper, even still at 152
30 00:05:09,960 --> 00:05:23,730 Point 77, five. And then in November, we have even lower prices at 150 1.2 75 and then drops off in January down at 145. So there is a premium in the feeder
31 00:05:23,730 --> 00:05:34,770 cattle market. So what does this imply? It means that there is something fundamentally strong about that particular commodity. In other words, the demand
32 00:05:34,770 --> 00:05:43,770 is high, and the supply is short. Okay, so you've never really heard me talk about supply and demand. Because I think that way of trading, especially as it
33 00:05:43,770 --> 00:05:51,780 relates to Forex, isn't the real thing you should be doing. But there are real supply and demand factors with commodities, because they're real tangible
34 00:05:51,780 --> 00:06:00,930 things, and people need to eat. So like I said, if you'd like cheeseburgers, and steaks, you're getting it from feeder cattle. So we're seeing a clear, obvious
35 00:06:01,350 --> 00:06:12,300 premium. And that seen by today's price, being higher than that of the next month out in the future months in the future. So if the price today's nearby
36 00:06:12,300 --> 00:06:23,970 contract is higher than the contract delivery months that are after it, in terms of the calendar going forward, that is a premium market. This promotes the idea
37 00:06:23,970 --> 00:06:35,160 of what is referred to as a commercial bull market. That means that the commercials, large dominant users and others commodity will be looking to take
38 00:06:35,160 --> 00:06:44,940 delivery of it right now immediately because they have to have it and it's a short supply of it. So if they're willing to pay a premium price for it now,
39 00:06:45,750 --> 00:06:49,860 versus what would be expected as a carrying charge premium later on and delivery months,
40 00:06:50,339 --> 00:06:59,549 they know that there's something fundamentally going on that they have to get to delivery of this commodity right now. So that's what causes these premiums to
41 00:06:59,549 --> 00:07:11,039 build up. Another example here is seen in live cattle. You see the cash market at the top, the delivery month for the nearby is June, it's closing price would
42 00:07:11,039 --> 00:07:23,069 be representative 131 point 20. And then the next month is August at 124 Point 17 Five. And then in October, we can see 120 point 40. So again, there's a
43 00:07:23,069 --> 00:07:36,179 premium in a nearby month, next month are selling at a lower price. So there's a premium here, implying that there is a short supply and the traders or those
44 00:07:36,179 --> 00:07:46,349 that are looking or seeking delivery of the actual commodity, the actual cattle themselves, the interest is so strong that they have to be paying a premium now
45 00:07:46,349 --> 00:07:50,549 for because again, the supply is short, but the demand is exceedingly high.
46 00:07:57,420 --> 00:08:06,210 Okay, so let's take a look at it a case study. And this is going to be done on the cotton market. And again, as I opened up this teaching, this is all delivery
47 00:08:06,210 --> 00:08:16,980 months for cotton, and knowing now what you're supposed to be looking for, and it's very simple. I want to ask you a simple question. Does the cotton market
48 00:08:16,980 --> 00:08:27,780 show us a carrying charge market? Or does it show a premium market? Again, we start by referencing a nearby contract versus the next month well
49 00:08:32,700 --> 00:08:42,240 there's a premium here. Okay, so, cotton is selling at a premium. So now we have the conditions that are ripe for a commercial bull market. Now, what is a
50 00:08:42,240 --> 00:08:52,620 commercial bull market? A bull market is classically seen with higher highs and higher lows and price increasing over time, obviously, but there's two different
51 00:08:52,620 --> 00:09:00,570 kinds of bull markets, one that goes up gradually stair stepping higher and higher and higher. And then there's another type of bull market that goes
52 00:09:00,570 --> 00:09:11,700 parabolic and vertical and it does it quickly in the amount of speed and magnitude the move takes place is usually a signature on hallmark of a premium
53 00:09:11,700 --> 00:09:20,250 based rally. Since usually the commodities that have a premium built in like we're discussing here, they have a tendency to move really quick and live
54 00:09:20,250 --> 00:09:32,730 distance and short amount of time. Okay, so we're looking at here this is the daily chart of the nearby contract for cotton were representative by the July
55 00:09:32,730 --> 00:09:39,900 contract. And I want you to take a look at price obviously when we look at commodities nothing is different in terms of how I look at price action,
56 00:09:39,930 --> 00:09:52,350 everything is based on PD raise, premium discount. Now when I say premium when it refers to commodities, that's the specific pricing of the nearby to the next
57 00:09:52,350 --> 00:10:01,740 month out if the nearby contract is selling at a higher price in the next month out. That is a premium. Do not confuse that with premium and discount PD arrays,
58 00:10:01,920 --> 00:10:13,980 okay, in other words, the PD array matrix, don't get confused by that. But in this particular commodity case study, we're going to look at the implementation
59 00:10:14,010 --> 00:10:26,010 of the things that I have already taught you. And now using it with gauging whether there's institutional buying with a premium market. Okay, so now what we
60 00:10:26,010 --> 00:10:36,060 want to do is, is once we load up our nearby contract, we want to develop a spread chart. Okay, and a spread chart is the difference plotted between a
61 00:10:36,060 --> 00:10:45,990 nearby contract and then next month out. You do that by going to bar chart.com. And you click on a little tab in the lower right hand corner here to start the
62 00:10:45,990 --> 00:10:58,920 spread chart. And I'm going to do a real quick view overview of it. Once you load your chart up, you go to the chart type, click to spread chart. Okay, and
63 00:10:58,920 --> 00:11:08,100 you want to go over to where it says first symbol, I'm gonna click on that drop down into your commodity of choice, and we're looking at cotton now. So we're
64 00:11:08,100 --> 00:11:19,980 gonna go to the cotton market tab, click on it, then we're gonna use the nearby contract delivery month, and that is July. And that's trading in the year 2017.
65 00:11:21,480 --> 00:11:28,980 And then we're gonna go over to the second symbol, we're going to be doing a spread between the nearby to the next month out. So you again, use cotton, and
66 00:11:28,980 --> 00:11:41,220 the next month out, is going to be October. And again, trading in 2017. And this is real important. Next thing you want to do is click on this little tab here
67 00:11:41,220 --> 00:11:50,550 and make sure it's to the minus symbol, because that's going to give you the difference between the nearby and the next month is scroll down here a little
68 00:11:50,550 --> 00:12:06,990 bit, click on the draw. And now Wallah, we have the cotton spread chart between the July and October months. The outcome is what you see here. And the
69 00:12:07,020 --> 00:12:16,800 significance of this is the zero line. Okay, so anything above the zero line represents the amount of spread that the nearby contract is trading above the
70 00:12:16,800 --> 00:12:30,300 next month. Now, ideally, the larger the spread, the stronger the likelihood of a commercial bull market, or a parabolic move, I want you to take a look at that
71 00:12:30,300 --> 00:12:43,500 spike that we saw in May, we're going to do a little bit of analysis there. But at that high in May, at its peak, the July contract was trading at six point 50
72 00:12:43,500 --> 00:12:54,450 Premium higher than the October delivery contract. So in other words, for July cotton, it was six point 50 higher than the October delivery contract for
73 00:12:54,450 --> 00:12:54,900 cotton.
74 00:12:59,009 --> 00:13:07,859 Now this is an overlay and all I had to create this with the software package that I create my videos with but I did it so that way you can see graphically
75 00:13:07,889 --> 00:13:18,659 what it is you're using the the spread chart for. So when we look at price and we are expecting higher prices, why would we expect higher prices? Well, cotton
76 00:13:18,659 --> 00:13:27,269 has been going higher and when it's done consolidation from January this year, it went higher than from March, April May it was in consolidation, but it had a
77 00:13:27,269 --> 00:13:39,299 premium. We also saw price trade down into a bullish order block in this first half of May. But I want you to look at the success of lower lows in that may
78 00:13:39,359 --> 00:13:50,399 decline. We may have made lower lows each candle each day. But look at the spread line. The spread line was actually increasing or in this case, diverging
79 00:13:50,399 --> 00:14:01,139 bullishly. Now it kind of looks like an indicator, doesn't it? And it is because it's price. Remember, price will tell you everything about price. We don't need
80 00:14:01,139 --> 00:14:09,869 to crunch any numbers. And you don't have to do any kind of acrobatic mathematics, it's simply an overlay of the spread of the nearby to the next
81 00:14:09,869 --> 00:14:19,739 month out. So what we do is we want to look for bullish divergence between price action of the nearby contract and the spread. So yes, it's gonna take a little
82 00:14:19,739 --> 00:14:27,539 bit of work on your part to be looking for these things and studying them. Do you need an overlay like this? No, but I did it so that way everyone could see
83 00:14:27,539 --> 00:14:37,349 it easily without any miscommunication at all. You can see clearly the spread chart and the nearby July contract for cotton being overlaid with one another.
84 00:14:37,409 --> 00:14:50,159 You can see the divergence of the spread. Now what's the significance of that? That's a buy signal. Going back to our July contract of cotton, we understand
85 00:14:50,309 --> 00:14:58,589 that institutional order flow is going to see bullishness and we trade down into a previous down close candle that saw price move away from it. That same here as
86 00:14:58,589 --> 00:15:11,489 your typical All shoulder block, it's also trading down in to the April high to April low range into a discount. So the PDA array matrix for that range, we're
87 00:15:11,489 --> 00:15:21,929 in a discount range, we're in a bullish order block in a market cotton showing a premium July trading at a higher price than that of the next month in October.
88 00:15:23,219 --> 00:15:37,559 So we see lower lows in price action as we trade into the bullish order block. But we saw the spread diverging bullish lead. That is only being shown when
89 00:15:37,559 --> 00:15:46,109 institutions are stepping in and buying a lot of it quickly, massively. So if you ever see that when a market has a premium, and its underlying bullishness,
90 00:15:46,409 --> 00:15:56,699 and it's in a discount, and we trade down into a discount array, like a bullish order block or close and avoid or fair value gap, or betrayed below an old low.
91 00:15:58,409 --> 00:16:10,739 In this case, we had that being seen with the last two trading days of April. We traded below those equal lows that seen in April around that 77 point 80 level
92 00:16:11,729 --> 00:16:19,889 and price trades down into the bullish order block. So we have a run on sell stops, we have a run into a bullish order block. And we have a would otherwise
93 00:16:19,889 --> 00:16:27,719 be I'm sure if we put a Fibonacci on it would be optimal trade entry long. At the 77 tradesmen level, I didn't do it. But despite my eye, I can see that's
94 00:16:27,719 --> 00:16:39,029 most likely what's happening. So we're seeing a spread divergences of the bullish spread divergence between a nearby next month out. And when we see these
95 00:16:39,059 --> 00:16:50,429 indications in price, it gives us strong willingness to support the idea of being a buyer. So we could be a buyer at 77. And it moves all get to 87, that's
96 00:16:50,489 --> 00:17:04,379 10 cent move, one cent move is 500 hours in cotton. That's a $5,000 move, in the course of less than a week, less than one week, one contract in cotton, pays out
97 00:17:04,379 --> 00:17:13,829 over $5,000. Now, obviously, we have the benefit of hindsight here. And obviously you all know that I have not been trading commodities for a long, long
98 00:17:13,829 --> 00:17:24,929 time, I've been primarily a forex trader. But these things are there every year, every single year, these are the hallmarks to what makes commodity trading fun,
99 00:17:24,929 --> 00:17:38,549 in my opinion. If we can spend time looking at the dare I say it fundamentals of a commodity market, we can get to a really strong bias for when we want to be a
100 00:17:38,549 --> 00:17:49,949 buyer. Now, this repeats itself in an opposite framework when there is a premium in the marketplace. If the market makes a higher high, say for instance, if
101 00:17:49,949 --> 00:17:52,169 cotton trades up to say 90 cents, it
102 00:17:53,430 --> 00:18:05,130 goes higher than 87 High worth noting here. But it does so with a lower peak in the spread, that does not promote or significant significantly confirm
103 00:18:05,640 --> 00:18:13,980 institutional buying, add to take that with a grain of salt, because just like anything else, the spread, you want to see that increase with the advancement in
104 00:18:13,980 --> 00:18:24,840 price. So if it's strong in terms of its premium driven rally, that spreads should be increasing as price rallies up. So if we'd see a divergence bearishly,
105 00:18:24,870 --> 00:18:32,940 where the spread fix fails to make a higher high, with a higher high in price, that would be an indication that we would have to look for reasons to trail our
106 00:18:32,940 --> 00:18:42,090 stop loss or maybe even some take some profits and wait for a new buy signal as outlined here. So now you've been armed with a wonderful Smart Money tool. And
107 00:18:42,090 --> 00:18:50,610 this works in all the commodities. And if you look at it from a fundamental standpoint, you will you'll always be trading with the fundamentals if you're
108 00:18:50,610 --> 00:18:59,550 using a premium based idea, like we're describing here. So if you ever had a doubt whether or not fundamentals are needed, in my opinion, they are for
109 00:18:59,550 --> 00:19:07,890 commodities, because they are tangible, real things that's the world's grocery store, everything that you eat or consume or need to operate in this world.
110 00:19:08,130 --> 00:19:16,770 Okay, it's usually in our commodity markets. So now you have a way of framing institutional buying and selling and know when they're going to be doing
111 00:19:16,800 --> 00:19:22,440 explosive moves in the marketplace. Until next lesson, I wish you good luck and good trading