For those who were investing at the time, it was the most remarkable, previously unfathomable, day in market history. For those who were not yet investing, it was still a day of mythical proportions. The day I am referring to, naturally, is Monday, October 19, 1987. At Dorsey, Wright & Associates (DWA), we came to work expecting business as usual, but by day's end we experienced the largest one-day percentage drop in the Dow Jones Industrial Average ever recorded. The Dow Jones dropped roughly 23 percent in one day, and after that the media began proclaiming a replay of 1929. DWA had been in business exactly 9 months and 19 days when this happened.

That day was significant to our corporate history because that single session changed the entire direction of DWA. It was as if we were moving from one train track to another. You see, we started out as an “Outsourced Options Strategy Department,” primarily servicing firms that did not otherwise have this type of department in-house. The blame for the crash of 1987 was initially placed squarely on the shoulders of the options market, however, and in particular portfolio insurance strategies and naked put sellers. Some firms were said to be on the verge of going under because of the options liability exposed on that fateful day. For most firms, though, things worked out. The market eventually rebounded, and today the tales of that one market session are legendary. Most advisers haven't been in the business long enough to have firsthand knowledge of October 19, 1987, but for those of us who have, it is a day that will not soon be forgotten.

That day could be looked at as Wall Street's “Big Bang.” It marked the financial end for some, but the beginning for others. DWA survived, just as most firms on Wall Street did, but that one day marked a new beginning for Dorsey, Wright & Associates. For us, it meant moving away from the options business almost entirely, as I knew wholeheartedly at the end of that session that the options business would never be the same again. I knew many firms would be enmeshed in litigation for years to come, that I was likely to become an expert witness for my clients during this period, and that few firms would be increasing their options resources in the near-future. That one day caused us to turn DWA around 180 degrees, pushing the options business from the engine to the caboose of our train, and the Point & Figure technical work to the front as our locomotive. It was a natural move for us, as we had employed the Point & Figure technical work in my Options Strategy Department at Wheat First Securities for year sprior. But on that day, we were forced to begin marketing ourselves as technical analysts instead of options strategists.

On October 20, 1987, I created the first Dorsey, Wright & Associates commodity report. I knew that if we were going to move out of the options business, we would need to fill that hole with something. Commodity prices are governed by the irrefutable law of supply and demand, making it a seamless application for our Point & Figure work. I look at most things in both life and business in the most simple of terms. Copper is, quite simply, a hunk of metal. Cocoa is simply a bean that grows, primarily on the Ivory Coast, and from time to time the locusts will come and wreak havoc. Coffee is similarly a bean that Juan Valdez and others cultivate down in Colombia. By the same token, IBM is simply a stock that moves about on the New York Stock Exchange, its prices governed by supply and demand imbalances. What makes the movement of cocoa's price different from the movement of IBM's price? One could offer that there are no cocoa CEOs to be carried out of their offices in handcuffs for various improprieties. There are no claims of corporate malfeasance thrust upon live cattle. But in terms of what causes a change in price, there is nothing different between a share of IBM and a contract of coffee. IBM is to cocoa as coffee is to copper, and so on.

There is no question in my mind that the Point & Figure method of analysis is best suited to evaluating those basic imbalances between supply and demand. Charles Dow himself popularized this methodology in the late 1800s because he wanted a logical, sensible way of recording supply and demand in the market. This was the case in spite of the fact that he was a fundamentalist at heart. The Point & Figure chart fit beautifully with commodities and in very short order our company was in the commodity business nearly 20 years ago.

At the time, I had never seen a soybean, or a cocoa bean, or even a coffee bean that wasn't already ground. Armed with the Point & Figure chart, I was an expert in their price movement just the same. I knew that if there were more buyers than sellers willing to sell gold, the price of gold would rise. Conversely, if there were more sellers than buyers willing to buy gold, the price would decline. If supply and demand for gold was in perfect balance, the price would remain the same. There is nothing else to consider. In October 1987, I created our first commodity report and had it marketed to a firm by the name of Interstate Securities. They had one of the most progressive commodity departments in the country and immediately liked what we had to offer.

Still, it turned out to be the right product at the wrong time. The stock market was in the middle of a 20-year bull market, while commodities were amidst a 20-year bear market. The report we had created didn't take off as we would have hoped; it was, quite simply, 13 years early.

Had we hung our hat on this single product, or any single product really, we would have ended up in Wall Street's graveyard, as Mr. Hamilton suggests in Chapter 1. The beauty of Point & Figure is that it is adaptive to any free market, and while the commodity business was ready to contract significantly for the next 13 years, the Point & Figure Technical Analysis skill we had developed for many years prior to Watson's and my starting Dorsey, Wright & Associates was applicable to many other facets of Wall Street.

There was one more act to the commodity show before we allowed it to atrophy back in 1987. There was a hedge fund manager in Europe who was a client of ours on the equity side. I talked to him one day and told him that his temperament was more suited to commodity trading. I offered him our commodity report for free so that he could get familiar with trading commodities on paper before venturing into the real world of platinum and pork bellies. This began a long and intriguing story at DWA, much of which I can only look back on and shake my head. It took this client about three months to get used to commodities and then one day I received a call from him, “Tommy, I'm ready.” I replied, “Ready for what?” Unabashedly, heoffered, “Commodity trading.” Well, the rubber hit the road that second, and I was immediately called upon to advise this large hedge fund on commodity trading, and I had never traded the first commodity in my life. I had a disciplined methodology to fall back on, but very little else at that time.

I set up this client with an introducing broker to clear through and we were off and running. If you can recall the last time you sat down to watch the Kentucky Derby, the horses are all in the gates, the bell rings, the commentator then offers heartily, “And they're off.” Well, that was us. This hedge fund manger had the intestinal fortitude of either a gladiator or one of those “lovely apprentices” that allows someone to throw knives at them. We started trading 500 lots of currencies at a time. A 500-contract position in something like the euro today is still a massive position, over 83 million US dollars worth of euros. At that time I either didn't or couldn't fully conceptualize the scope of these positions; it was simply colossal. Come to think of it, I don't think we ever had a calculator that would quantify that amount of leverage back then, so we just didn't get the full flavor of the risk we were taking. Today, I would break out into a cold sweat with a position that size. But back then, we did it, did it regularly, and didn't flinch. Buying 600 gold contracts for this client became commonplace. At this writing, each contract controls 100 ounces, or $50,000, worth of gold. Six hundred contracts is then $30,000,000 in leverage. Still, this client didn't even breathe heavily with a position of this magnitude, and so eventually, neither did I. At any given moment, we could have been long 500 yen, 500 British pounds, or 500 Canadian dollars, and I vividly remember at one time being long 2,000 contracts of various currencies.

My entire day and night was devoted to this account. He required me to have one of the first cell phones available at the time so that we could be in constant contact. This phone would be called a “suitcase” by today's standards but it was cutting edge at the time. He would have me take the Concorde to Europe to simply have dinner with him. It was the wildest time I have ever experienced in my 31 years in the business; and just as many stories of excess unfold, this did not end well. Strangely enough, it was not the commodity trading that eventually caused his fund to hemorrhage; it was actually a risk arbitrage trade in United Airlines. He was, as today's Texas Hold'em player might say, “all in.” To this day I am reluctant to even consider “deal” stocks, as I have witnessed someone hold out for the last drop of a merger deal that eventually fell through. The fund imploded as a result.

Seeing this type of thing take place firsthand is surreal, and after that our commodity research took its place on the back burner of what we do here at DWA. There just wasn't the demand present to suggest otherwise. We focused on our stock research and this is where we built a strong business that finished its twentieth year in 2006. The key to our success over time has been our ability to adapt to the changing landscape. The Point & Figure methodology is one of the few forms of analysis that truly allows one to do so in such a seamless fashion. Five years ago we were able to correctly identify a new positive trend developing in the broad commodity markets, and thus we dusted off the old commodity charts and began actively trading a corporate commodity account. Even employing very little of the potential leverage available within a commodity account, this portfolio has performed exceptionally well, which we will discuss in more detail later in this book. While my experiences trading currency futures 500 lots at a time makes for a good story, the comfort I feel today in the commodities market is far more a function of simply having a logical, disciplined approach toward managing risk to fall back on. I feel as comfortable trading commodities as I do stocks. I still don't know what a soybean or a cocoa bean looks like, but I have been very successful trading them nonetheless.

What we will aim to do in this book is teach you what we know about trading the commodity markets using the Point & Figure method. We would suggest that you familiarize yourself with some of the basics of commodity trading, such as hours of trading, contract sizes, and other environmental influences. All of this information is readily available on the Internet or in other various commodity books. We won't rehash that work, but will rather focus specifically on using the Point & Figure tools to develop a disciplined trading plan for commodities. We will also examine the many commodity-related vehicles that are present in today's markets outside that of strictly futures contracts. I think you will be both amazed and delighted to see the various instruments available to you in today's market.

For a handful of reasons, this book is unique for Dorsey, Wright & Associates when compared to the many others we have authored to date. First, this book is a collaboration of all my analysts who participate in managing and advising our very successful Corporate Commodity Account. The collaboration doesn't end there. We also teamed up with Josh Parker on this book. Josh is a partner of Gargoyle Asset Management LLC and is the manager of their Hedged Value Fund, which I have participated in for many years. Josh is a past trader on the AMEX floor and one of the authorities on trading whose input I respect greatly. Second, this book is the first book we've written that is totally devoted to commodity trading using the Point & Figure method of analysis. We have found over the last 30 years that the irrefutable law of supply and demand governs all prices whether it is cocoa, Japanese yen, or IBM. The simpler one keeps trading, the better the results. In this book, we present our results from the DWA corporate commodity account, which adheres to the principles of Point & Figure charting, which in its simplest form is a logical organized method of recording the imbalances between supply and demand. The leverage we used was solow, one might even considerour commodity investing account to be on a cash basis.

With this book, we have strived to give anyone interested in commodity trading, a logical, organized, sensible method of managing such an account utilizing the Point & Figure methodology. To help you in continuing to manage a commodity account, whether through futures, exchange-traded funds, or mutual funds, you will find all the charts, relative strength analysis, and commentary you need at www.dorseywright.com. If you are not already a client, you can take advantage of a three-week free trial of the largest Internet charting system in the world at www.dorseywright.com.