The good news is that oil has broken higher on news that OPEC had voted to make modest cuts in oil output. The move should take some weight off other commodities which oil has influence over, such as grain.
While this was good news for oil, the grains remain stuck in the lower end of their trading range. The overwhelming weight on the grain market is the dollar which is on day 28 of a cycle which normally lasts 28-40 days. If you study the constant daily struggle the dollar has to make any progress higher or lower, you realize the manipulation occurring from central banks around the world trying to stimulate their economies via currency wars. Though the central banks can influence these wiggles day to day in the shorter run, in the longer run, I have to believe natural market forces will push the dollar lower to a new daily cycle low.
The dollar currently sits on day 28. Dollar cycles run 28-40 days bottom to bottom typically. I am expecting this move to begin at any time. When this happens, we should get a move out of the present trading range the grains are stuck in.
With Harvest well under way, it would seem that everything has taken a breather, including assets in non-agricultural markets. Its why I have not posted much as of late. The last post I made 3 weeks ago focused on oil, and oil and they have gone practically nowhere. You basically have consolidation occurring in a relatively tight trading range. I expect just as I have felt now for months that when the dollar finally breaks lower, we should see some upward momentum with stocks, energy, metals, and grains.
I think we will get that breakdown of the dollar any day, and when that happens, my expectation is that you will see a rally in oil back to the $49.5-$50 area before oil trades lower into its daily cycle low in mid October. Yes, last month I was predicting this breakout to be larger. Instead, oil has been trapped in a range.
So this brings us back to the dollar. Everything I recommend on this website is influenced by the dollar, the most manipulated asset in the world. If it is not the Fed printing money, they are raising or lowering rates. If not our own fed, central banks around the world are manipulating their currency, which in turn affects the dollar. Interventions are happening here and abroad on a daily basis it seems.
That said, the dollar still has a date with destiny at its 3 year cycle low next summer. I discussed how this works at great length back in July. The drop to its ultimate low will occur with probably 2 intermediate cycles, each of which will have probably 3 daily cycles. The first daily cycle low is what we are awaiting.
So the chart below reflects my general view of the effect I see the dollar breaking into its daily cycle low will mean. (Please note, these are trajectories, not predictions). This is why patience is so crucial at this moment in the harvest gut slot.
In the August 30 report, I predicted that the corn market was at a bottom, and that it would likely grind higher into the fall. That certainly appears to be the case if you take away todays action. What today has done however is to reset sentiment. Sentiment reached 31 today, just a point higher than what Sentiment Trader deems extreme. Extreme bearish sentiment is necessary to cleanse the system. You need the weak money to cough up their short positions, leaving buyers to step in and begin the next rally. I believe we are but a day or two from this happening, perhaps when the dollar finally gives.
Corn looks to be forming a head and shoulders bottom. A modest retracement of 38.2% would be necessary for this pattern to complete. If that happened, it would allow price to catch up to the 200 day moving average. I don't believe any drop in the dollar will last more than 2 weeks, and I am not sure that gives enough time for corn to rally to that level. We will just need to wait and see what happens to corn in real time when the dollar does break.
I will throw in my 2 cents worth on soybeans. I am fairly neutral here with soybeans. Price seems to be supported by the 200 day moving average, and the optimism index has reached extreme bearishness. I would be mildly bullish here, and you should expect some sort of rally. The dollar will have a lot of influence on how far it will go, much like corn.
When I recommended the oil trade on August 30, oil was at 46. I was not expecting the scary drop the following day obviously, but in hind sight that was near the low. Had you asked me yesterday morning about taking the oil position, I would have recommended holding off as I felt oil was potentially painting a bear flag. Oil closed the day strong however, and now I believe we should have a few more good days.
So here is the quandary. I am bullish oil as I have said, but the oil cycle is getting long in the tooth. Oil cycles typically last 40 - 60 days trough to trough. Today marks day 26. By the time oil reaches $50. it will be 5 more trading days, getting us into day 31. If this cycle last 40 days, those weeks following could be a scary ride.
So the point of this post is that we should expect a move lower in the next couple of weeks. When trading with leveraged instruments, it is perilous to become greedy. We will be much better to exit this trade early. I will be recommending an exit most likely by the end of next week.