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 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 viewed as paper trades only okay folks the June 2017 ICT mentorship ICT commodity trading Lesson Four Premium versus carrying charge markets and this is going to provide you an x-ray view of institutional order flow thank you when we look at Commodities one of the best resources you have at your fingertips and for free is on barchart.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 available and we find that by going to the select commodity tab over here and you just scroll down and you find whatever commodity you want to do your analysis 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 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 Investors Business Daily not that they're not listed now but that's where I would usually scan I would look for a premium or a lack of premium in the delivery 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 charts website 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 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 disclosure's 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 the last and generally if there's a cash Market that could be seen or commodity they'll list it first on bar chart bar chart.com and that'll be at the top of the list and then immediately below that you'll see the first contract delivery month or what is referred to as the nearby contract the immediate contract 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 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 today's price viewed in the nearby contract if today's price is 940 on the July contract of 2017 soybeans we could see in August the next month out there should be an increase in net premium or closing price and we see it here so in July 2017 soybeans closing price would be representative of 940 and in August its closing price would be representative of 9.43 and 4 10. so we're seeing an increase and then the next month out further out in November we can see that the closing price is 9.45 and then in January of 2018 it's 9 52 so this is a typical carrying charge Market nothing fancy about it doesn't mean that we can't find 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 commodity is far less likely to occur than that of if it had a premium now looking at a market that has a premium in it we're looking at the feeder cattle here again bar chart.com we can see the cash Market listed first and the nearby contract at the time of this presentation is August 2017's feeder cattle and it's closing price if it were closing prices it would be 154.80 and the next month out would be September 2017 feeder cattle with its price of 154.125 so the nearby contract is selling at a higher price not much but it's selling at a higher price so therefore we have a premium Now the way you look for whether there's a strong premium or a really significant premium is you want to go out to the next month beyond the next month out so in other words you want to look at the next few months so for August yes there's a premium based on the price that's seen in September but in October we have it cheaper even still at 152.775 and then in November we have even lower prices at 151.275 and then drops off in January down to 145s so there is a premium in the feeder cattle market so now what does this imply it means that there is something fundamentally strong about that particular commodity in other words the the demand 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 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 things and people need to eat so like I said if you like cheeseburgers and steaks you're getting it from feeder cattle so we're seeing a clear obvious premium and that's 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 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 of what is referred to as a commercial bull market that means that the commercials large dominant users and of this commodity will be looking to take 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 versus what would be expected as a carrying charge premium later on in delivery months they know that there's something fundamentally going on that they have to get the delivery of this commodity right now so that's what causes these premiums to 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 its closing price would be representative of 131.20 and then the next month out is August at 124.175 and then in October we can see 120.40 so again there's a premium in the nearby month next out months are selling at a lower price so there's a premium here implying that there is a short supply and the Traders or those 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 for because again the supply is short but the demand is exceedingly High okay so let's take a look at 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 the delivery 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 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 out 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 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 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 parabolic and vertical and it does it quickly in the amount of speed and magnitude the move takes place is usually a signature and Hallmark of a premium based rally so usually the Commodities that have a premium built in like we're discussing here they have a tendency to move really quick and a lot of distance and short amount of time okay so we're looking at here this is the daily chart of the nearby contract for cotton we're represented by the July 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 everything is based on PD arrays premium discount now when I say premium when it refers to Commodities it's the specific pricing of the nearby to the next month out if the nearby contract is selling at a higher price than the next month out that is a premium do not confuse that with premium and discount PD arrays 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 uh implementation of the things that I have already taught you and now using it with gauging whether there is institutional buying with a premium Market okay so now what we want to do 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 nearby contract and the next month out you do that by going to barchart.com and you click on the little tab in the lower right hand corner here to start the spread chart and I'm going to do a real quick view a review of it once you load your chart up you go to the chart type click to spread chart okay and you want to go to where it says first symbol I'm going to click on that drop down into your commodity of choice and we're looking at cotton now so we're going to go to the cotton Market tab click on it then we're going to use the nearby contract delivery month and that is July and that's trading in the year 2017. and then we're going to 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 Carton and 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 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 out yes scroll down here a little bit click on the draw and now voila we have the cotton spread chart between the July and October months the outcome is what you see here and the 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 next month out 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 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 6.50 premium higher than the October delivery contract so in other words for July cotton it was 6.50 higher than the October delivery contract for cotton 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 what it is you're using the spread chart for so when we look at price and we are expecting higher prices why would we expect higher prices well cotton has been going higher and went into a consolidation from January this year it went higher then from March April May it was in consolidation but it had a 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 successive lower lows in that may decline we made lower lows each candle each day but look at the spread line the spread line was actually increasing or in this case diverging bullishly now it kind of looks like an indicator doesn't it and it is because it's a price remember price will tell you everything about price we don't need 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 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 going to take a little 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 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 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 that institutional order flow is going to see bullishness when we trade down into a previous down closed candle that stall price move away from it that scene here is your typical bullish order Block it's also trading down in to the April High to April low range into a discount so the PDA Ray Matrix for that range we're in a discount range we're at a bullish order Block in a market cotton showing a premium July trading at a higher price than that of the next month out October so we see lower lows in price action as we trade into the bullish order block but we saw the spread diverging bullishly that is only being shown when 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 it's underlying bullishness and it's in a discount and we trade them into a discount array like a little shoulder block or closes then a void or fair value Gap or if you trade below an old low in this case we have that being seen with the last two trading days of April we traded below those equal lows that seen in April around that 77.80 level and price trades down into the bull shorter block so we have a run on Cell stops we have a run into a bullish order block and we have a what would otherwise be I'm sure if we put a Fibonacci on it would be optimal trade entry well at the 797 transom level I didn't do it but despite my eye I can see that's most likely what's happening so we're seeing a spread Divergence this is a bullish spread Divergence between a nearby next month out and when we see these indications in price it gives us a strong willingness to support the idea of being a buyer so we could be a buyer at 77 and it moves all the way to 87 that's 10 cent move one cent move is 500 in Cotton that's a five thousand dollar move in the course of less than a week less than one week one contract in Cotton pays out over five thousand dollars 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 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 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 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 cotton trades up to say 90 cents a you know it goes higher than 87 higher note in here but it does so with a lower peak in the spread that does not promote or signif significantly confirm institutional buying you'd have 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 price so if it's strong in terms of its premium driven rally that spread should be increasing as price rallies up so if we see a Divergence bearishly where the spread 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 trailer 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 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 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 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 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 explosive moves in the marketplace until next lesson I wish you good luck and good Trading