Now, an army may be likened to water, for just as flowing water avoids the heights and hastens to the lowlands, so an army should avoid strength and strike weakness. And as water shapes its flow in accordance with the ground, so an army manages its victory in accordance with the situation of the enemy. And as water has no constant form, there are in warfare no constant conditions. Thus, one able to win the victory by modifying his tactics in accordance with the enemy situation may be said to be divine.

-- From The Art of War by Sun Tzu

In trading, as in war, you must be selective in waging battle. Most of the time, you should trade with the prevailing trend. But when you can detect chinks in the armor of an upside move, that's the time to "capture booty" by taking partial profits, or to launch trades against the main trend, striking at weakness to the main force.

Here are the signs of weakness I detect in December soybean oil (BOZ2:CBOT). As I've said before, multiple signals are stronger than any individual signal, and bean oil has shown signs of weakness in each of the past four sessions.

  • Last Friday, the market traced a double top, a well-known topping pattern.

  • On Monday, the market traced an outside bar, engulfing the open and close of Friday's bar.

  • On Tuesday, bean oil continued to show its desire to go lower by gapping away from the engulfing bar and failing to fill the morning gap.

  • On Wednesday, the market did fill the previous day's gap, but not on a closing basis. Bean oil finished Wednesday at a six-day low, again engulfing the previous day's bar.

  • Another simple sign indicating a break in the upside momentum were the multiple closes below the 10-day moving average: For the third straight session, bean oil finished below this line Wednesday.

Bean oil's trend has been very symmetrical, pulling back between 1.20 and 1.34 in each of its four major pullbacks since February. (Only the third and fourth pullbacks are shown in the next chart.) This suggests bean oil will pull back to test the 20-even area, a level consistent with this market's cycle and with the three Fibonacci retracement ratios shown. If the price were to break down below 20.00, that would be a hint that bean oil could test cluster support lower at 19.74, 19.40, 19.17 or 18.77.

Intraday resistance for Thursday's session resides at 20.93 and 21.03. These levels are areas to watch for short pattern setups with narrowly defined risk. For instance, if you were to get short on an intraday pattern at 20.93, the stop-loss would go a few ticks above that level, or slightly higher, depending on your risk tolerance.

For those unfamiliar with trading soybean oil, let's review its contract specifications from the Chicago Board of Trade. The initial margin or performance bond per contract is $540. The contract is quoted in cents per pound. The contract size is 60,000 pounds. Each 0.01, or 1/100-cent, move is $6, which is also the minimum fluctuation or tick value. So a 1-cent move (a move from 18.00 to 19.00), 100 ticks, is $600.

The CBOT's open outcry session lasts from 10:30 a.m. to 2:15 p.m. EDT. Electronic trading for this market is available, but only between 9:30 p.m. and 7 a.m. EDT on the Alliance/CBOT/Eurex trading platform. The symbols for contracts traded on a/c/e are different to distinguish them from the day session. For instance, December soybean oil's symbol on a/c/e is (ZLZ2) or sometimes (ZLT2), depending on the data vendor and your broker's electronic trading platform interface.

Contracts initiated on the a/c/e platform are completely fungible with contracts from the open outcry session, meaning you can offset positions initiated during the night on a/c/e with contracts traded in the bean oil pit and vice versa.

Steak and Juice

Although intraday they've dipped three ticks below the make-or-break confluence of support I pointed out on Aug. 22, October live cattle (LCV2:CME) futures have not closed below 67.000. They actually closed Wednesday just above the trigger point of an extended pullback from a high setup, suggesting the market could move higher Thursday. The way this market is holding up, I'm moving the make-or-break point slightly lower to the 66.700 area. For live cattle, the minimum tick of 0.025 equals $10, so every 0.100 move is $40, and every 1.000 move is $400.

As W.D. Gann and Jeff Cooper have pointed out, markets often move in threes. October hogs (HGV2:CME) have had three 2.000 limit moves (an exchange-imposed daily maximum move) in seven sessions. Hogs have now achieved a 100% extension measuring objective, where the distance A-B equals A-C. Look for a sizable reaction to fill a gap before a resumption of the downtrend. Also, it will likely be difficult to exit this market if the deluge continues.

Looking at Levels

A few other markets that have been in recent uptrends are now pulling back and displaying tight clusters of support that may provide long entry opportunities.

  • For October crude oil (CLV2:NYMEX), 27.65, 27.05 and 26.50 stand out.

  • In October unleaded gasoline (HUV2:NYMEX), 0.7603 and 0.7490 loom.

  • September S&Ps (SPU2:CME) have a tight level at 896.50 to 898.50.

Finally, with November becoming the front month contract in orange juice (OJX2:NYBOT), notice how the outgoing September contract (OJU2) has plunged 4.65, or 4.5%, since its reversal bar on Aug. 13.
Marc Dupee is an independent trader and co-author of the book The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to Marc Dupee.

TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.

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