The dollar is playing out as I expected it would late last month, and I think the dollar has quite a bit further to go before finding any sort of support. These dollar cycles often times find turning points around the unemployment report, which in this case will be February 3. By then, the dollar will likely break the intermediate trend line and the 200 day moving average.
One of the main commodities to benefit from the decline in the dollar will be corn. I pointed out last month that I expected corn would move higher as the dollar declined, and now corn has broken out above its intermediate trend line and its horizontal resistance. A move to the $4.09 level at the 78.6 retracement makes a logical target at the very least.
Corn has a lot of upside before reaching oversold levels. Sentiment readings are not even at 50% yet. There are still plenty of buyers for this rally.
The only indicator that causes me pause is the Commodity Channel Index. The CCI is nearly at oversold levels already. If corn can't reach 4.09 by the time a sell signal is given by the CCI, I may pull the trigger on corn a bit earlier.
Here is an update on where Wade Assurance grain marketing recommendations stand for the 2017 crop year.
Knowing the fundamentals of the corn crop were going to limit reasonable selling opportunities, I chose to trade in other markets that I believed would be easier to manage. My contention was that corn would grind higher since calling the bottom in late August which is when I recommended the synthetic long position using oil which worked out very nicely for the 2016 crop. Unless you have a day trading mentality, which I don't, it is very hard to make money long or short corn when the fundamentals are bad.
So here we are now already into the 2017 crop year. I have made no physical corn sales yet, but have made a recommendation to sell wheat puts which I believe will produce a 35 cent boost to our cash sales, and I recommended shorting December oil, which I believe will produce around another 30 cent boost. I expect to have a 65 cent premium on top of our cash sales.
I have made several recommendations on soybeans:
June 8, sold 10% of expected 2017 production at $10.05
Nov 28, sold 10% of expected 2017 production at $10.36
Jan 12, sold 30% of expected 2017 production at $9.95
Jan 12, bought serial puts on 50% of 2017 for .10
This should have us 50% cash sold for an average of 10.05. The options premium will come off the next 50% to be sold.
I prefer selling at peaks, but this last sale had some major consequences to be felt if prices had gone down. Rather than take the gamble, I chose to spend some money and manage the position. We are still 50% unsold, and soybeans are again making a run for $10.40. Expect more sales at that level. If you have yet to sell, its time to catch up!
There was a lot of fear leading up to Thursday's USDA report which turned out to be for naught. Excessive pessimism in the corn, soybean, and wheat markets all proved to be the fuel the grains needed to post strong rallies today.
The biggest surprise came with soybeans. My fear was that price might break support below 9.80 on the November contract. Instead, we had a very nice bounce. That said, I don't think we will get $11.00 soybeans that easily. The obvious target for soybeans would be $10.43, the previous contract high. At that point, we have a double top and we should probably make another sale. I would like to see the CCI make a sell signal and the optimism index reach overly optimistic levels when prices reach that level.
Corn received a much needed lift today. Corn broke well above its 200 day moving average, as well as its downward sloping trend line. The explosion in the wheat market did not hurt it any either. I think there was enough bearish sentiment in the corn market that it will have no problems getting to $4.00, although we will probably have to deal with a sell signal on the CCI soon.
Speaking of wheat, it is on a roll after the report confirmed winter wheat plantings at the lowest level since 1909. The puts I recommended selling on December 7 are working as expected. I expect we will keep the entire 35 cent credit we collected, applied towards the corn marketings.
Anybody growing wheat should probably consider selling some wheat near the 200 day moving average as we should be triggering a CCI sell signal around that time.
The dollar appears to be throwing in the towel finally. The dollar is on day 25 of a cycle which normally lasts 28-40 days, so the daily cycle is in decline. There are likely another 3-12 days of decline remaining before another daily cycle begins. Because the 3 year cycle is due to bottom sometime this summer, we will also need a lower intermediate cycle.
The dollar chart below shows two trend lines. The downward sloping line is the daily cycle line. When the price trades above that line, it will be confirmation that a new daily cycle is beginning. The upward sloping line is the intermediate cycle line. The price will need to move below that line to confirm the beginning of a new intermediate cycle. I think once this current daily cycle bottoms, we will get a bounce which will break through the downward sloping daily cycle line, confirming the beginning of a new dollar cycle. The next dollar cycle however will be left translated (it will peak early) and move lower below the intermediate cycle trend line before bottoming. This will probably be a scary event, but should provide a lot of support for commodities through the end of February.
I have been saying for weeks now that oil is due for a yearly cycle low. Rather than post another daily chart, I wanted to show the weekly chart which gives a bigger picture. Nearly all the major indicators I follow are saying to sell. First, just the timing of the cycles say we are due for a yearly cycle low (red arrows). Sentiment readings are just now falling out of excessive pessimism. The RSI has just passed below overbought levels, and the stochastic readings are crossing into bearish readings. There is still time to short oil, and that is the safest trade out there that I can see presently as it pertains to agriculture. All the other trains have left the station.
None of us can know what direction the market will go or how far it will go with the WASDE report Thursday. News always trumps any sort of technical analysis tools. I do have a few ideas for how I would manage the risk in this situation.
I am not terribly worried about corn right now as it is already below most producers break evens. My position with corn since late August is that it would grind higher which it has, and I still feel that way. I believe the downside is limited for several reasons.
1. Normally a rising dollar would push grain prices lower. Despite a rising dollar and a massive carryout in corn stocks, corn prices have slowly crept higher. I believe this could be in part because soybean prices have moved significantly higher, and pushed the corn-soybean price ratio to wider than normal levels.
2. When the dollar moves lower, I think traders will reward corn with a nice pop.
Unlike corn, which is already below break even, soybean prices are somewhat above break even. This you have to protect. If you have followed my soybean sell recommendations, you would already be 20% sold at $10.215. There are numerous ways to protect your soybeans from lower prices, but this is what I am recommending.
1. Get to 50% sold the board, either via shorting futures with a brokerage account, or better yet, with a futures only contract at your elevator. Futures only, not cash. If we have a dramatic drop in soybeans, the opportunity exists to take advantage of some major basis appreciation.
2. Price the remaiing 50% of your soybeans via serial put options. These options expire on January 27, and will provide a pretty good floor to get us through Thursday's report. The cost of the $10.00 strike option is 11 to 11.5 cents per bushel. If prices move higher out of the report, you could immediately sell the puts to recover some of the cost.
Following these strategies will assure that you have locked in soybeans at profitable levels, and have left open the possibliity to get closer to break even on corn.
Synthetic Corn Sale
By the way, had you followed my synthetic corn recommendations, you would likely gain .35 per bushel from the wheat puts we sold, and another 25-30 cents from the oil short.
Speaking of the oil short, oil has begun its move lower. Oil did rally today however, and actually touched the level where I began the trade at $56.80. With any strength in oil tomorrow, I highly encourage taking this position. Every dollar oil moves is worth $1,000. I expect we will get at least a $5.00 per barrel move in the weeks ahead. One oil contract would be equivelent to 17,750 bushels of corn, so every dollar oil moves lower will in essence have a 5.6 cents per bushel effect on corn. Manage the risk with a $57.9 stop.
Tight stops can get very expensive. I am entering the oil short a third time. at 57.09 the Dec.
Got stopped out of the oil position again for another $250 loss..... .015 cents per bushel.
Looks like our stops were swept, but this position is still valid. It looks as though the market is giving us a shooting star, which are pretty reliable topping indicators. I am recommending the same set up that I recommended on Friday. Enter short at 57.25 with a stop at 57.50.