Understanding a Life of Contract High and Low
Understanding a Life of Contract High and Low
When Stock traders are examining Stock charts, they are often focused on new 52 week highs and lows. Since Stocks never expire and have to be rolled over like a Futures contract does, these yearly highs and lows become critical deflection or breakout points. Most charting packages will alert traders to these new 52 week highs and lows. Figure 1 will show a chart of CMEGroup Stock prices over the past 52 weeks.
52 week highs and lows are not based on last year's or this year's high and low. They come from taking the highest and lowest prices 52 weeks back from the most current date on your chart. Figure 1 looks at CME from December 1, 2010 back 52 weeks to December 1, 2009. During the previous 52 weeks, we see that the CME traded as high as 353.03 and as low as 234.50. With each trading day that passes after December 1, 2010, the computer looks back 52 weeks from the new date and if a new 52 week high or low is recorded, then you are alerted to this event.
Futures contracts do not use 52 week highs and lows as Stock traders do. All Futures contracts have a first day of trading (beginning of contract life) and a last day of trading (end of contract life) that last anywhere from 13 ñ 18 months on average. There are some Commodity Futures that trade for much longer periods such as Crude Oil and Eurodollars. During the life of these contracts, there will always be a highest and lowest price of the contract dating back to the first trading day. Figure 2 shows a weekly March Sugar contract.
You can find life of contract highs and lows by creating a weekly chart and compressing the candles together until you see the last bar on the left of the chart. This will be the first week the contract started trading. Make sure you are using a contract specific chart and not a continuation chart. In TradeStation, you would want to use SBH11. Do not use the @ symbol for this will give you a continuous contract.
I have marked off the current life of contract high and low points in Figure 2. The high and low will be subject to change at any time the price exceeds them before the contract expires. The Sugar contract for March delivery actually began trading on March 31, 2008. The last day of trading for this contract will be February 28, 2011. During this time there will be other contract months of Sugar trading simultaneously, and each contract will have its own life of contract highs and lows.
The significance of this article is to make you aware of the difference between a 52 week high/low and a life of contract high/low. Now that we know how to identify the two types of extremes, let's look at what they mean.
As we trade from day-to-day, we understand the significance of a market that rallies and finds overhead supply, then retreats from that level leaving behind an area of price resistance. The same can be said for a market that declines and finds demand at a lower level and causes the market to rally leaving behind an area of price support. We also know that the use of multi-time frames allows us to determine just how strong a support/resistance level may be when the market returns to challenge it. For example, a support level that was created on a monthly chart will be much stronger than one created on a daily chart. A level created on a daily chart will be much stronger than one created on an intra-day chart and so on down the multi-time frame list. I would recommend knowing what the contract high and low is of the market you are trading and knowing where you are in relationship to life of contract highs and lows.
Traders often use life of contract highs and lows as levels to enter the market. For many breakout traders, they are willing to buy new life of contract highs after a meaningful breakout, and sell new life of contract lows on a meaningful breakdown. I think this has merit because it shows that something fundamentally has changed in this market causing people to pay up or down for these new prices. I would recommend that if you trade these breakouts, that you wait for the breakout and then enter on a pullback to the origination of the breakout area.
Other traders will use life of contract highs and lows as areas of support or resistance. For example, as prices rally into life of contract highs, they will look for previous supply levels and take a short position. When prices reach a life of contract low price, they will look for previous demand levels to enter a long position. You must be careful at these levels because the market will have a nature of breaking life of contract highs and lows and then reversing directions. An example of shorting a life of contract high can be seen in Figure 2. Look at the end of 2009 and notice how the Sugar market was making new life of contract highs coming into year end. When the market resumed trading after the New Year in 2010, we notice that the price tried to breakout and failed. This would not be considered a meaningful breakout. There were two things happening at this moment just from looking at this chart. First, there was a yearly high (2009) created in December along with a new life of contract high. Confluence like this tends to make me want to be short this market considering the strong rally into the year end of 2009.
Notice how strong the Sugar market has been once breaking above new life of contract highs in September 2010. Looking at current market conditions, we have another large rally into the end of a year (2010) and a new life of contract high. Sugar has been in a strong bull market with inverted market prices (each contract month less expensive than the next), showing a full blown bull market in Sugar. Some people were looking to short this market when it rallied back to test the November highs recently. I was not that interested in shorting since that high was not a yearly high and because of the strong bull market. Now I am watching the price action when we re-test the December 2010 high and life of contract high at 34.77 for a possible trend reversal. Notice the potential Head & Shoulders reversal pattern beginning to build.
Will Sugar reverse from these levels or will it continue its bull market? Please remember that this is not a trading recommendation, but purely an educational exercise.
"If you change the way you look at things, the things you look at change." Wayne Dyer
- Don Dawson
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