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blueberrycake

Support/Resistance on Contract Roll-over

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I've recently taken to trading physical commodities such as Oil (CL), and I am finding that there can be significant disparities in price between contracts for different delivery dates. This presents an interesting problem for establishing the correct Support/Resistance lines on the daily charts. Is it better to look at just the current contract, or does it make sense to use continuous charts of the front contracts (backadjusted?) to get a longer term view. The two approaches can yield dramatically different lines for S/R. Any thoughts from those experienced with such matters?

 

-bbc

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:2c:Good question and its an often ignored and this is one of those that has no right or wrong answer. You will just need to work out what makes sense with your method, form a valid way of measuring the SR and the way to build your continuous contract and then the key is to remain consistent to it.

 

If you are day trading, you can almost ignore any continuous contract and just focus on the contract that is being traded. If swing trading /longer term trading then you have more issues.

Especially around the contract expiry.

 

Beaware that there is a difference between a continuous contract and a back adjusted continuous contract. (there are plenty of articles around and a few threads here with the same info on it)

I would not necessarily back adjust the contract if short term trading and looking for SR, as I feel this is more relevant for long term back testing and properly taking into account when the rolls occur and adjusting for the backwardation or contango. Rather I would just use a continuous contract. Be aware of the gaps near expiry and work on your rules for SR......most data providers will supply these.

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You can see a good example of this in CL right now. If you look at the current (November) contract, the next significant level of resistance for the current uptrend is in the 83.50 - 84 range. If you look at a continuous chart of just the front contract, the next level of resistance is around 82. I am pretty sure we're going to see a retracement at resistance given the length of the current run, but the question is, what's the level of resistance that the major players are looking at? :hmmmm:

 

-bbc

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There are two approaches that make some sense and it probably depends how far you want to take it back.

 

1. Backadjust while you form continuous contracts but use highs and lows rather than the final close to line the contracts up. I do this as a check with HSI which rolls over monthly and line up the last few big swings on the old and new contracts when joining them.

 

2. Use spot prices. When approaching longer term resistance check the gap between current futures and spot prices then add/subtract that from the spot chart for the old S&R to find out where the S&R would lie on a current spot contract. If you were a really big boy you wouldn't need to do that because you'd have real time spot price charts available on your desk. But as a little guy you can figure out when the old spot S&R will be hit by your current real time futures contract.

 

An example is Crude Oil Spot and Natural Gas Spot Prices - NYMEX

 

2b. Use the spot prices (old charts) to identify S&R then use one of the "live quote" sites that have metal and energy spot prices to alert you to proximity of the old S&R prices.

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Using spot prices seems like a very good idea. At least you know that you are comparing apples to apples. Now that I have these three potential resistance levels (current contract, continuous, and spot), it'll be interesting to see which one is closest to the reversal point. Are there any sources of spot prices that you can pull directly into a charting program, such as Sierra?

 

-bbc

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