In addition to the reasons explained in the Risk vs Reward post I made Tuesday, another reason not to jump ship with the corn market is the fibonacci level we are at today.  These sort of touches are important.  It is amazing how prices seem to be drawn to these levels.  I expect today will mark an end to the bleeding near term in the corn market. 

Is the market always fairly priced?   Wikipedia says it is the value based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market.

Then what is meant by "overbought" or "oversold"?  How can a market be oversold or overbought in a fairly priced market?  Most traders will use the term to describe it as when an oscillator such as the CCI reaches a level of being overbought or oversold.  In strongly trending markets, these indicators have limited use because they can remain overbought or oversold for long periods of time. 

Supply and Demand will always be the backdrop of any market.   We are willing to pay more for what we need in times of scarcity, but may not want to pay much for the same things in times of abundance.  Lets face it........ there is a lot of corn out there, and buyers know they don't have to try very hard to get it when they want it.  That my friends is a buyers market. 

The various reports you read that reflect supply and demand are what really dictate a market over time, but in the absence of news, traders focus on other things that can impact the market they are trading such as the dollar or even oil.  Smart money follows when traders are moving money from one asset class to something different.  Moving money from overpriced assets to underpriced assets is the bread and butter of the professional trader.  This is what can move prices higher even though the news is bearish. 

The first chart below shows corn over the last 5 years.  At the bottom of the chart is the commitment of traders report which shows the number of long and short positions held by commercial elevators (end users), large traders (Goldman Sachs), and small traders (you).  I find it interesting that in the last 5 years, the large traders have never been so short.  What do you think would happen if they decided to exit their short positions?  They exit short positions by buying.

I find this next chart particularly interesting in that it shows that over the last 2 years, the December 2014 corn chart has only been this wide from its 200 day moving average 5 times of 63.5 cents.  Only one of those 5 times did it exceed that difference for a few days by only 12.5 cents.  That was only for a week, and it was followed by a powerful rally as the shorts exited their long positions.

If you are a large trader, what offers you the most reward for the risk?  I realize this kind of thinking can stress your nerves, but isn't that just what a professional wants?  Who always seems to be left holding the bag?  Not the pros.

Bean prices broke lower as I expected them to.  Already, the option I had explained on the opportunities page which was worth .20 at the time is now worth .292 cents.  That is the nature of options and why orders need to be placed ahead of big moves.  Once the train leaves the station, it becomes extremely difficult to find a safe place to jump on.

You can see from the chart below that we had a breakdown of support.  I am anticipating that this will end with prices in the $12.00 area, based on fibonacci extensions which prices seem magically drawn to.  At that time, I would expect the CCI will then be saying it is time to sell the puts, or to then adapt a bullish options strategy (Selling Puts) to collect more premium.  My position would then become more bullish for the reasons I explained earlier this week.

The bear flag that I showed on the 26th post seems to be happening.  The coiling effect that I explained typically creates moves that are powerful once they begin moving. 

To remind you, the catalyst for this move is not fundamental agricultural related news, but news from the FOMC meeting this week which triggered a huge dollar rally.  I wrote that this would happen back on  Saturday.  Despite all the fundamental news coming from the agricultural news services, it was just a massive money flow from commodities back into the dollar.  When this rally is over, we should have a nice rally into next year as the dollar falls into its 3 year cycle low.  This will provide the bulk of our opportunities for contracting grain.

Yesterday, I outlined an option strategy on the opportunities page to provide some protection against a potential leg lower the market could make.  I wanted to discuss the option strategy a bit further to attempt to better explain some things about taking that position.  Here is why this position makes sense to me.

This position could be used as a cross hedge.  By this, I am saying that you could hedge corn and wheat using soybean contracts.  With the charts below, I am attempting to diagram that corn for the most part is grinding lower.  In addition, it is .63 below its 200 day moving average.  It has traded that wide 4 previous times which was followed by a counter move.   Any move lower would be very limited.  In addition, this contract has never traded lower.   I also believe wheat looks more like it could have a small bounce.

Soybeans are at their 200 day moving average and an area of support.  This is an actionable place professional traders would look at to take a position because there is room for it to move.....higher or lower.  There is a lot of room lower this position could go.  If that makes you uncomfortable, then buy the option.  My outlook improves a lot after one more move lower.

If prices move lower, we would leg into a bear put spread reducing cost.  I am more bullish in the longer term, so capping the downside on the beans at .80 - $1.00 does not add much risk to the position.   This will NOT make the position marginable.

If prices rally higher, we will sell the put we bought to collect back unearned premium.  I am never married to a position.  The purpose of this trade is to provide protection against a rising dollar pressuring commodities should they announce some tapering of the quantitative easing program.  Should they expand the program, you could see further declines in the dollar and commodity prices rise.