The most-hated commodity this week is corn, where the Optimism Index dropped to 21 on Thursday.
Corn Sentiment at an extreme. Of course, we have seen that since late August, corn or any commodity can reach an extreme and stay there for a long time.
Statistics show that six months (120 days) after corn reaches such lows, corn showed a positive return 90% of the time, averaging 10.6%. Fundamentals look terrible, but they always do when pessimism has been this prevalent and this persistent in any commodity.
Remember, you are in the arena with people with multi-million dollar research departments who are counting on you selling cheap corn. Here is some sound advice however from multi-billionaire Warren Buffett who said "Be fearful when others are greedy. Be greedy when others are fearful." I will tell you that great rallies are preceded by extreme pessimism.
Close but no cigar would describe how I feel about my call for a bottom back on 8/29. I think I make pretty good market calls but I missed this one by a few points. Corn closed 3/4 of a cent lower on October 20 and December wheat just made a new low November 1, a nickel lower.
I have always said that most of us who are in the market have a very limited skill set relative to the other participants. We are the dumb money when compared to the likes of Goldman Sachs and Archer Daniels Midland. They have multi-million dollar research departments who are very good at what they do. If they were not, they would not be in business very long. Case in point is the low in wheat that I just mentioned.
Wheat bottomed (again) on day 46 of its latest cycle. Normally this cycle would last around 30 days. It slowly melted lower for 3 weeks longer than normal and it felt like 3 months. We are all worn out by it. We feel defeated. We think we are going to lose our arse. Our nerves are shot. Our spouses are pissed. Do you think for a moment that Mr. Goldman or Mr. Sachs don't know this? Of course they know this! They are excited about all this cheap grain they are about to buy, and you are more than relieved that they still want it.
All the tools and tricks of the trade that retail traders can learn about stock and commodity trading from are in the tool kit of every multi-national trading firm. They know what retail traders are going to do before we know what we are going to do. Its because we are human beings, and since God created us, we have all been wired to do the same thing. Its called human nature. We cannot help but kick into fight or flight mode when our emotions kick in. The recognition of this gives the smart money traders a very big advantage over us poor dumb money traders.
One of the tricks of the trade that most of you know about are breakouts and breakdowns. They happen at support and resistance levels. When the price of an asset breaks out, it is free to move higher from a resistance area. If the price of an asset breaks down, it is going to keep moving lower. This is what every trading manual will teach you. It makes me wonder who wrote these things.
Wheat is a classic example. I asked people who would listen not to sell wheat when the price broke below support on Wednesday. The breakdown represents where most of us would give up and become frightened enough to sell our positions. Sometimes they will go lower, but not when sentiment is at extreme lows.
Lets say for the moment that I am a large spec house. I am wanting to get some cheap grain on the books. I put in a few orders to sell enough wheat to push price just below support like what happened Tuesday. How many automated sell orders do you think were hit? Not sure, but it was the second heaviest volume day in the contracts existence. There were a lot of sellers that threw in the towel at that moment. The spec houses bought a lot of cheap wheat that day. Now prices appear to be moving higher again.
If you find yourself short wheat puts and you are feeling upset, scared, or dumb, that is a natural thing to feel. Just remember that your enemies know this also. My recommendation is to fight your human nature and hold this position at least a few days longer to see what develops before doing what the smart money traders want you to do.
Do I think December wheat will reach the $4.75 target by options expiration on November 24? Well, I am doubtful to be honest unless some fresh bullish news is revealed. Do I think this will be a profitable trade? I would say it is likely. Even if you sold your puts later than I originally recommended...like around $4.40, we only need prices to rally 18 cents for you to break even. We are on day one of a new daily cycle. We could get there in a day or two. If this is the bottom, and I am going to say again that it is, we should see this cycle top in about 3 weeks. That would be right about options expiration! That would be a perfect trade!