Playing Your Futures Cards

The old song had it only partly right -- not only do you need to know when to hold 'em and when to fold 'em, you also have to know when to reverse your position.

Momentum plays in the major futures markets are providing examples of when to do each of these.

Currencies are the hold-'em plays. On the upside you have Canadian dollars (CDM2:CME) (see my columns on April 23 and May 6), the euro FX (ECM2:CME), Swiss francs (SFM2:CME) (see my May 14 column ) and the Aussie dollar (ADM2:CME), which I wrote about on May 21.

The Aussie dollar is perhaps the most noteworthy, because of its increasingly bullish fundamental story. Short-term interest rates are already 275 basis points higher on average than those available in the U.S. The Bank of Australia is also slated to raise rates another 25 basis points this week to cool a potentially overheating economy. In this vein, the International Monetary Fund recently forecast that Australian GDP will grow at a 3.9% annual pace, the second-fastest among developed economies. Corporate profits, retail sales and construction are expanding, attracting equity players, and the "commodity currency" will also continue to benefit from higher gold and metal prices.

The soybean complex is also in a momentum, hold-'em phase. Soy meal (SMN2:CBOT) is leading the charge with Chinese demand for the protein source expected to kick in and potentially increase export demand. Grains move better when the entire complex moves together. Both July corn (CN2:CBOT) and wheat (WN2:CBOT) have recently shown bottoming signs and could play catch-up to the bean complex. The less-followed oat market (ON2:CBOT) is also lending support to the grain category by trading at contract highs.

When to Short 'Em

Dollar index futures (DXM2: NYBOT), which I wrote about on April 18, remain the obvious short play against the above listed currencies. Strength in currencies, particularly in the euro, will continue to keep the dollar index in a downside momentum phase, even as the contract approaches support at the psychologically important 110 area.

July crude oil (CLN2:NYMEX) and its products continue to break down. Russian supply and the situation in Venezuela should continue to weigh fundamentally on the energies. Another negative is excess output by OPEC itself. The cartel exceeded output quotas by 6.4% last month, increasing world supply.

Besides having the tenacity to stick with a winning position, the key to extracting the most out of these upside or downside momentum hold-'em plays is early recognition. Review the April 16 article in the archive for ways to ride the crest of momentum.

When to Fold 'Em

Knowing when to walk away from a failed signal is equally important in maintaining a consistently rising equity curve. When a signal fails, as five-year notes (FVM2:CBOT) did recently when they gapped above their evening star Doji pattern, get out quickly and take your losses. Walk away and move on to the next trade.

When to Reverse

Failed patterns, such as the above-mentioned failed Doji in the five-year notes, can be among your strongest signals. A combination of signals can mean even stronger signals and provide your best reversal opportunities.

The blowout Monday, June 3, in equities kicked stock index futures into downside momentum phases according to the criteria I've previously set forth . Two other factors are also working to substantiate the accelerating downside momentum in stock index futures. Nasdaq 100 (NDM2:CME), S&P 500 (SPM2:CME) and Dow futures (DJM2:CBOT) all broke the bullish symmetry they had off their May lows, and the S&Ps and Dow broke the May lows. The failure and reversal of these stock index futures' attempted follow-through rallies indicates the S&Ps and Nasdaq 100 futures will test lower to triple digits.