The oil trade I recommended yesterday was stopped out at $49.60 which was a $400 loss per contract. This trade had everything I like to see when taking on a position except for the sentiment readings. The failure hold what I thought might be a mid cycle low has told me that we may very well be getting a failed daily cycle.
A failed daily cycle will take out the previous cycle low at $47. Daily cycles run from 30-50 days on average. The fact that this cycle peaked at day 13 which is not half way through the cycle tells me that this is a left translated cycle which are bearish. We are now at day 20, so I suspect we still have 2 more weeks to go before oil finds a bottom.
I won't be interested in touching oil again for at least 2 weeks. I would like to see a very scary drop that will indeed mark the yearly cycle low and cleans the market of any bullish sentiment. At that point, I will probably give this another try.
It stinks getting stopped out of a position you believe in, but to be stopped out by two one hundredths of a point makes it hurt. As I looked at oil over the weekend, it still should complete out as I had originally planned. The trade I had laid out has been using December oil. The nearby contracts are the vehicle most traders use. The nearby crude contract retraced exactly 50%. I had set the stop below the 50% level on the Dec contract to account for something like this but was still kicked out.
Enough of looking back. The original premise of the oil trade is still in tact. We just got caught in a steep correction into a mid cycle low. I recommended earlier today to re-enter December oil at $50.00 with a $49.60 stop.
The steep retracement gives a good reference point for which we can construct our trend line. As the first daily cycle out of a yearly cycle low, I think surely the market will produce enough follow through to send oil above its previous cycle high which had peaked at 55. This cycle will top at 55 to 60 at a minimum. That means oil should have some insanely big days. Sentiment levels have retreated, but possibly most importantly, this trade will be easy to manage here at the bottom of a mid cycle low. With the stop at $49.60, we are only risking $400 but have the potential to make another $6,000. Those are good odds.
The larger picture shows oil has a long way to trade to before this intermediate cycle is tops. The weekly chart shows that oil still has a LOT of room to trade higher before the RSI and Stochastics reach oversold conditions as it has the past three intermediate cycles.
If you missed getting on board the train the first time, you should consider getting on now. It will leave the station at any moment and this will be the last chance you get to participate.
Out of oil. The oil position hit the $49.50 stop. Oil traded to $49.48, so we were knocked out by two one hundredths of a point. We pocket $1,500.00, but still.....very disappointing.
Tradable assets normally have some sort of retracement in the middle of a trending move. Cycle traders would say the asset is trading into a mid cycle low. Oil trades in 30-50 day cycles. I expect that since this is the first cycle out of a yearly and intermediate cycle that it will take longer to complete its move. My expectation all along has been a rally to around $56 on the Dec. Today marks day 15 of this new daily cycle, so I am thinking that this will be a mid cycle retracement.
I have stated before that I thought oil would find some resistance near the 200 day moving average at $52.50, and oil made it to $52.60. Now we are having a mid cycle correction. This is why I had not pushed up the stop from $48.....because I did not want to be stopped out of the position from a mid cycle correction.
As of this writing, oil has made a 38.2% retracement. We might even get a 50% retracement, however I doubt it. If price falls below the 50% retracement, we will get stopped out of our position for a small gain.
A retracement such as this does two things. First, it creates a point to set a cycle trend line (green line on chart). This will be an important technical level to follow moving forward.
The second thing the retracement will do is re-set sentiment. Sentiment was about 50% yesterday. This will lower sentiment a few points and set the table for the next leg higher. By the time oil reaches $56, we should reach excessive optimism levels. At that point, we will either exit the trade or push the stop very tight.
As I suggested on Friday, corn is moving higher out of the coil which had been forming for weeks. Corn is headed back to revisit February highs at a minimum.
This has the potential to be a big mover. The COT Data shows that commercial hedgers are holding nearly 100,000. When hedgers become net long to an extreme degree, we should be looking for pries to rise.
The other driver of this rally is the dollar which is seeking out its 3 year cycle low as I suggested would happen last summer. The dollar is into its blood bath phase which will mark the end of this three year cycle. At any other time in the year, this would be a key element on grain price movement. This rally however would probably be occurring without the help of the dollar. The Dollar certainly has not helped soybeans.
It would not surprise me if we have a spike like we have had the past two summers that will take corn to $4.20 or even $4.40. If we reach those levels, I will be recommending the sale of most of the corn crop. When the dollar finds the bottom, it will begin a new 3 year cycle. It will then have a very strong rebound for the next year which will pressure all commodities. It will pressure corn also once this seasonal rally is completed. This might be the last great chance we will have to sell $4.00 corn for a while.
Oil is working out just as planned. I recommend tightening up the stop to $49.50. This guarantees $1.50 per barrel of oil or $1,500 per contract. The next major resistance oil should have will be at the 200 day moving average around $52.50. I am still believing oil has potential to top at around $58.00 on this cycle. That would be off my chart!
I think the stars are finally in line for a good corn rally. The insurance company people I speak to are telling me that there are a lot of replants happening, and that there will be a lot of preventive planting taken. Some of the ground that would have been planted in corn will instead be planted in soybeans. In short, I believe we have a situation where the top end of the corn market has been taken off.
Seasonally, we are well into the period which should produce weather rallies if we are to get one. The seasonal chart below proves that pollination fears in June are largely unfounded. Corn mostly moves higher through May. Positive net returns are achieved between December and May. You usually want to have 75% of your corn marketing finished by then.
Corn optix did reach excessive pessimism this week. The corn market is running out of sellers. As a function of the commodity markets, when a person is short a position, the way to exit the position is to buy. This creates a rally which triggers stops which creates more buying. Speculators notice what is happening in the corn market then they decide to buy. So what you have is a buying frenzy happening between the greedy speculator crowd wanting to get on board the train and frightened people who are short trying to get off. This is why sometimes you get huge moves in the market while the experts are busy explaining the rally away finding some sort of news out there to credit the rally to.
The corn chart is showing a massive coil, or spring. Moves out of a spring tend to be sudden and strong.
As I look at corn, I believe the risk is to the upside. I would not want to be short here and believe we will have a good chance for $4.00 corn and maybe a lot more. Keep in mind, these kinds of rallies disappear as quickly as they happen. It would not be a shock to me for corn to be back below $4.00 a month from now.
For the record, I have not made any corn sale recommendations to this point. If corn optix reach excessively bullish levels in a few weeks, I will probably make one very large sell recommendation.
Oil vs Corn
The grain markets have more or less been trending sideways now for 9 months due to burdensome inventories and no fear of running out of grain. The constant chopping of price makes profiting from your marketing impossible unless you are a day trader. Oil on the other hand has been moving like it normally does in large daily cycles of 30 to 50 days and larger intermediate cycles of 25 to 33 weeks. They are so predictable that you could nearly put them on a calendar. You will get 2-3 opportunities a year to buy oil at the bottom of these cycles. If grain is not in any sort of tradable move like we are in now, trading oil instead will make your life so much easier.
In the chart below, I am attempting to show how much easier buying and selling oil is compared to corn. When you combine the cycles with the sentiment readings from Sentiment trader, it produces trades which are much easier to manage.
Tightening Stops Again
Oil has moved into the resistance zone I warned about Wednesday. This is a critical area. If price can break out and close above $49.50, there is pretty much nothing standing in the way of $52.50. If price cannot break through, then my concern about sentiment is probably about to be realized and oil will make one more drastic move lower.
If we tighten the stop to $48.4, we will guarantee making at least $400. If price falls below that level, I think there is a very good chance we will see a lower low.
The synthetic oil position which I recommended very early yesterday (I worked on it until 1:30 yesterday morning) is up pretty good today. If you took the position yesterday afternoon, you probably got an even better fill than the one I posted at $48. Oil is up 3% today as I write this at $49.25.
When I recommended the trade, I had a very loose stop placed at $46.90. I am being cautious here, but I am recommending increasing this stop to just below yesterday's low at $47.60. $49.5 will be the first resistance area oil meets. Should oil break through this level, the next resistance will be at $52.5 at the 200 day moving average.
When I recommended the trade, my enthusiasm was somewhat muted due to higher sentiment than I really wanted. I wanted this trade in case I was wrong and we were beginning a new intermediate cycle because the gains can be so big. Moving the stop to $47.60 limits the loss to $400 should I be wrong.
What I am leery of is that the market could hit resistance and trapped longs take advantage and sell, pushing prices lower. There is a lot of overhead resistance in oil right here, going back to the August low. What I don't want to happen is that oil bounces lower off this resistance and drop to last summers low around $46.
When/if oil hits $50, I plan to increase stops again locking in some gains. Again, if the market is moving into a new yearly cycle, prices out of this daily cycle should reach $56. That will be an $8,000 gain per oil contract.
Ideally we would be talking about a mega rally on corn and soybeans following flooding and heavy rains across most of the mid west during the peak of the planting season, but this is not the case. I suspect there are two reasons for this. First I believe traders have been fixated on supply demand numbers and burdensome inventory levels and not the weather. I expect this will change soon. The second reason grains have not lifted off yet could be tied to commodities as a whole and oil in particular.
The chart below shows consolidation in commodities beginning last summer. The previous low in the CRB Index from August 2016 was 176.67. The CRB touched 176.68 late last week. At the very least, this has become something to trade because the risk is easily managed.
This is an actionable point. Its a place where you can easily define the risk, enter a position, and place reasonable stops. The risk/reward ratio here is
On the chart below, you can see that oil has formed a swing low. This is the signal to enter a long trade. It is not a guarantee that prices won't still move lower, but it is a strong entry signal. I would prefer that the CCI had moved below -200.
Sentiment values are probably the main reason I feel very guarded in recommending this trade. Despite recent weakness, the optix still shows that there are 40% bulls. I would prefer that this level be lower than 30 with the oil priced around $42.00. In fact, the optix are slightly higher than they were ahead of the last daily cycle from last March. When we were stopped out of our oil short in March, I said then that I thought we would still have one cycle lower, which we did. The reason I felt we would have one more cycle lower was that I did not feel sentiment levels were not low enough. Here we are again.
My recommendation is to place a synthetic long trade today on your corn or soybeans using crude oil as a vehicle. I am expecting to keep this position at least three weeks because daily cycles last at least 30 days, and I am expecting this to be a right translated cycle out of a yearly cycle low. The position size is interpolated to make the oil contract the same in size as the corn or soybean contract margin wise, so one oil position is roughly the same as 3.6 corn contracts, or 18,000 bushels or 1. soybean contracts, or 6,429 bushels. Below are the contract specs you need to know.
So for every 18,000 bushels of corn or 6,429 bushels of soybeans you expect to grow, you would want to buy one December oil contract at $48.00 per barrel. You would keep the stop at $46.90 using the December contract. The stop would mean that for every contract you are risking no more than $1,100, or .061 per bushel on corn and .171 per bushel on soybeans. The stop is loose to give the contract some room to move through any volatility of a basing pattern.
If this is the beginning of a new intermediate cycle like I am betting on, we should see a very powerful rally, probably to the $56 area. That would be an $8.00 move, or $8,000. This would be worth .44 cents per bushel for your corn and worth $1.24 per bushel on your soybeans. This is a 7-1 risk reward ratio for the corn and soybeans.
In summary, my biggest concern is that sentiment is not as pessimistic as I prefer. I like how the CRB seems to be forming a double bottom. Most of all, I like the potential reward for the limited risk.