Since calling a bottom of corn and wheat back at the end of August, neither have really gone anywhere. The initial thrust out of intermediate cycle lows have not produced strong rallies over the last year. In the July 2017 wheat chart below, you can see where I recommended selling wheat puts, and the first cycle was flat both times.
The synthetic position from the 2018 July Wheat contract I recommended last month is basing as well. This is not bearish behavior. It is simply a market that needs to burn through a bit more bullish sentiment.
Had you sold the puts back on August 29, you could have collected over 50 cents a bushel to add to your corn, soybeans, and wheat marketings assuming wheat is over $4.75 at expiration. While it is possible, I don't believe corn is going to rally 50 cents. Corn would have to rally to $3.95 achieve that sort of gain which would be nearly a 70 retracement. A 50% retracement to the $3.80 levelwould be much more realistic which would be only .35.
Wheat on the other hand does not even need to make it to the 38.6% retracement to keep all the premium. Wheat only needs to reach tie 200 day moving average for it to be a profitable trade.
By Thanksgiving, I expect to be pricing 100% of my 2017 corn around $3.80, plus adding an extra .52 from this synthetic position. When you add to this the $1.05 from the other synthetic trades, this will give me a total of $5.37 for 2017 corn.
I have not written a post since I called the bottom at the end of last month. Sitting on hands is a strategy, so I have basically done nothing as far as marketing goes. As it stands now, things are going along about as I expected.
Corn actually bottomed a day after I called the bottom, so I was a day early. Corn quickly bounced to the 23.6% fib before stalling out. It has since trended sideways for the most part, but did break out of a triangle yesterday. Barring something unforeseen, I expect prices to slowly move higher from here. I am expecting prices to retrace $3.80 eventually.
Corn is still one of the more hated commodities. This leaves open a lot of room to the upside.
When you look at a weekly corn chart, you will see that the oscillators are just beginning to turn higher. This is the kind of price action you would expect to see out of an intermediate cycle bottom. You do not want to be selling grain now if possible.
I am mentioning wheat next as we have an active synthetic long position working with wheat that quite a few people picked up.
Wheat did bottom on the day I called the bottom. On Wednesday, wheat reached the 23.6 Fibonacci and bounced off like you might expect. I think we could get some sort of pull back down to the daily cycle trend line but feel very confident in the trade. How much premium we will keep is still not certain, but I feel pretty good that we will keep all of it. The next Fib retracement is 38.2% which is at $4.87. Given that the puts we sold were $4.75, I think the odds are good we will keep all the premium.
The weekly wheat chart still looks good. There is still a lot of room to the upside. If you are a wheat producer, I would not be making any sales here.
I won't say a lot on soybeans because for the methods I use, they are just not tradable with any high degree of certainty. Price has already reached a 50% retracement but backed off after only one day. It looks to me that the 200 day moving average could be pretty strong resistance.
The weekly chart is not giving many clues as to price direction either. I am officially 75% sold on soybeans this year for the track record. If price can reach the $10.30 area which will be near the 200 week moving average, I will sell the remaining 25%.
I have tried to prepare you that a bottom in grains was eminent, and I think we have reached that point today. I have already written about how I would play this bottom. Hopefully you have made a decision of what you are going to do and you will get it done.
Corn has all the classic signs of a major low.
Wheat has all the markings of a bottom as well.
Let me summarize why the good money is betting on the long side now:
1. Dollar is failing and dropping into a 3 year cycle low
2. Sentiment levels on corn are excessively pessimistic
3. Corn and wheat both showing hanging man doji's
4. Corn at the161.8% Fibonacci extension level
5. Weekly wheat and corn oscillators beginning to turn up
I have outlined selling wheat puts on two occasions ( December 2016, April 2017) and in both occasions we were able to keep 100% of the premium we collected. Folks, in bear market years there is no easier way to get your revenue above your break evens than by selling puts at intermediate cycle lows. I recommend this strategy not only for wheat, but for all your corn and soybean bushels.
To recap, selling puts is a bullish strategy. I only recommend this strategy at the beginning of intermediate cycles because short puts are marginal. I want the underlying asset to take off to the upside because paying margin calls is not the easiest thing for most people to do.
But why sell options? 80% of all options expire worthless, so it is usually the option seller, not the option buyer who consistently makes money. Selling at ICL's give the best possibility of avoiding margin calls. The largest gains in any market are made in the first few weeks after the beginning of a new intermediate cycle. This time it is even better because wheat is also at a yearly cycle low. The gain in wheat should be very good which is why this time, I am recommending selling a higher strike option.
For every 5000 bushels of corn or soybeans you wish to apply this strategy towards, sell one 4.75 December put. This put will expire in 13 weeks on November 17. You will collect .52 per bushel. As long as wheat closes at or above $4.75 by June 16, you will keep all of the premium you collect. If it falls below $4.75, then you will have to cover that amount. Say the price is $4.50 on June 16, you have to pay .25 per bushel back, but you would still keep .27. From that standpoint, you would still gain on the strategy. The only way you can lose money really is if the price falls below $4.23. Given where we are with the cycles, the oscillators, and the dollar, I feel confident losing money won't happen. Why did I choose $4.75? Because that will be close to where the 200 day moving average will be on December 17. If wheat prices break above that level, (which I expect it will), then it will probably move back to the $5.09 area which would be a 50% retracement of this waterfall decline wheat has been having.
Being conservative, wheat will probably need only one daily cycle to reach $4.75. An intermediate cycle is two or more daily cycles. The option will expire on November 17 which means we have 2 daily cycles to reach $4.75 by options expiration. That is a very mild gain for wheat.
I am officially applying this strategy to help my soybean and corn positions. I am presently 75% sold on soybeans, but I am applying this strategy to 100% of my soybean positions. I am also applying this strategy to add to the synthetic trades I have made this year. I have yet to price any corn bushels. This should net me an additional .52 per bushel on all my corn and bean sales. This strategy will also work well on wheat.
There will be a little something for everybody on this post. I won't spend any time on stocks, bonds or precious metals in this post, but you can see that according to Sentiment Trader, Agriculture is the asset class most out of favor right now and poses the least risk for playing the long side.
I first wrote about this event back last summer when in July I wrote about the dollar cycle and how predictable its nature is. Below is an updated chart which shows we are due for a 3 year cycle low, probably this fall.
We would normally expect such weakness in the dollar to correspond with a pretty nice rally in the grains. That has not happened yet as Chicago has been trading weather, but I think this will change soon........very soon.
The commodity cycle lasts a bit longer than the dollar cycle at 3.5 years. The last commodity cycle bottomed at the beginning of 2016. I was not blogging at the time, but those who sat through my crop insurance presentations should remember that I was extremely bullish grains back then and we did have a monster rally.
I think the dollar is on the cusp of making another leg lower. This very well could be all the grain market needs to break it from this horrible bear market. In the dollar chart below, you can see that we have begun a new daily cycle. We are only on day 9 and already the cycle has failed. Most daily cycles last 18-25 days which means we have at least another week of the dollar moving lower. One other idea to consider is that there is a debt ceiling vote in October. I would not be surprised to see the dollar continue to sink lower into a very stretched daily cycle until the debt ceiling vote in a move that looks much like the move the dollar had back in June/July. If that were to happen, the dollar will be deep into the .80's and American corn will look very cheap!
Looking at the weekly chart, we can see that corn bottomed in August in 2015 and 2016. I think corn will bottom in August this year as well. You also see that the Stochastics and the RSI are at very over sold levels. This is telling us that a bottom is imminent.
We have just now reached extreme bearish sentiment levels on corn believe it or not. The market has been cleansed of most of its bullish sentiment which is necessary for a sustainable rally.
I would recommend the following three things to any farmer growing corn: 1. Do NOT sell cash corn or any corn on the board. 2. Set their basis. 3. Lift their hedges if possible.
Corn is at an actionable level and close to a bottom but soybeans are still not telling me much. The weekly stochastic, RSI, and CCI levels are not telling me that beans are near a bottom yet and I am not finding the sentiment levels on soybeans a dependable indicator these days. A weakening dollar will still help soybean prices however. I don't see a lot of downside to waiting on to make any futures sales.
Soybeans are dropping their leaves in the Glendale area already and the combines will be running soon. The basis will go to pot quickly once these soybeans begin arriving at the elevator. I would recommend locking in basis levels now but would not recommend pricing any beans on the board.
That's quite a massacre in the wheat market since wheat topped back in July. Sentiment levels have not reached excessively bearish levels yet, but the weekly stochastics are showing that we are near a bottom.
The daily wheat chart shows that we could be getting a swing low.
If you are a wheat producer, I would recommend that you lift your hedges soon if not now. I would also recommend selling some puts to add some premium to your wheat. I outlined this idea on August 17 as part of a synthetic strategy and could give the recommendation to sell puts as soon as Monday.
One of the easiest ways I have found to create some additional revenue is through selling wheat puts at intermediate cycle bottoms. Since I recommended selling 50% of your wheat back on July 11, wheat has moved lower it seems every day. Wheat has now lost $1.15 per bushel since I made the sell recommendation.
There are usually 2-3 intermediate cycle lows every year. These moments are where we expect bottoms to occur which will last several months. This is where you have a high likelihood of profiting from selling puts. Rallies out of intermediate cycle lows tend to be strong. For an option sale to be successful, we only need price to trend higher or sideways for a couple months. 80% of all options expire worthless, so the real money to be made is in selling the options, not buying them. The chart below shows we should be nearing the time for an ICL to occur. Price has already broken the IC trend line which should confirm that a new intermediate cycle will begin once a bottom has been put in place.
I have implemented this synthetic strategy twice this year. The first time in December when we collected .35 per bushel, and the second time in April when we collected .31 per bushel. 66 cents makes a huge difference in a year like this year.
I won't pretend to know right now exactly where this bottom is going to occur, but if price can manage to break below the April ICL....say to the 480-470 range, it will probably trigger a buy signal on the CCI. CCI buy signals have a pretty good track record for marking major bottoms.
Believe it or not, sentiment readings are still not at extreme bearish levels like I would prefer to see, but I will feel pretty good when the CCI says to buy.
We are into the time of year when average returns from owning wheat are the strongest. Below is the seasonal wheat chart from Sentiment Trader.
If this is a strategy you might be interested in implementing to gain some price premium to your wheat, corn or soybeans let me know. If you need a brokerage account, now is the time to get one opened. Click here if you need one. You don't have to fund the account to open one. Like I had mentioned, rallies out of ICL's tend to be strong. You don't want to waste valuable option premium by waiting around trying to get your account opened. When I see what I believe is a bottom, I will detail the trade recommendation here.
Oil closed higher on the continuous oil chart yesterday, and today the December oil chart is showing strength. This means that the cycle will likely be right translated and we should expect to see higher prices for the next month or two anyway. My strategy this late in the daily cycle is to keep the stops more snug to keep as much of our gains as we can before prices drop into a daily cycle low. We are probably still a week or two away from this daily cycle topping. Dec Oil will probably work its way to $49 before this cycle tops.
This locks in a profit of $2.10 per barrel, or $2,100. For the synthetic positions, this will mean an additional
Stops were triggered at $47.50. This synthetic trade is now closed.
The oil positions have not provided the returns so far that I had hoped coming out of an intermediate cycle low. I must admit I am a bit disappointed. The chart below shows how explosive returns can be as price rallies out of an intermediate cycle low. I attribute the sluggishness this time to the fact that sentiment was not at an extreme. Extreme sentiment fuels hard rallies. The chart also shows how common for mid cycle lows to occur early at intermediate cycles, just as this one did.
I have pushed up the stop for $46.50 to lock in a profit. I recommended buying the position at $45.40, so this locks in a profit of $1.10, or $1,100 per contract.
Bull markets are marked by right translated cycles. The oil cycle usually runs 30-50 days. For a cycle to be right translated, then it must top at least after the cycle is half the way finished, meaning 15-25 days. Oil is presently on day 20. The previous high was on July 5, which was only on day 9. For this to be a new intermediate cycle, its first daily cycle should be right translated. I think it will be, but this sluggishness has factored into the decision to tighten the stop.
This sluggishness is also tempering my expectation for this trade. My initial expectation was for oil to make $52-54 in its first daily cycle, I am beginning to believe it will take at least two daily cycles to get there. That being the case, I may recommend that we exit positions should oil reach the 38.9 Fibonacci at $49 if price must grind higher to get there.
Most marketing publications use Fibonacci Retracements as a tool to spot potential targets for actionable events. Most people who trade use Fibonacci's and they are one of my favorite tools. The other side of the Fibonacci retracement is the extension. What if price trades above a consolidation area where it has never been before? Enter the Fibonacci Extension.
2018 July Wheat has pushed against such a level at 261.8%. In addition, the CCI will soon project a sell signal. I don't make wheat recommendations as a general rule, but this has sell written all over it. I am recommending to get to 50% sold 2018 wheat at $6.025.
I had mentioned on my last post that oil should be moving into a half cycle low and thus creating the point where by a trend line can be drawn. This cycle is presently on day 13, so we should enjoy a strong bounce for the next week or two. If you wanted to participate in this trade or add to your position, you probably want to get on board today. The risk is easily managed here with a stop just below the mid cycle low near $44.50. You can still get on board near the same price as where the original recommendation was made back on June 27.
I finally have something to write about regarding grains which really is the purpose for me writing anything on this blog in the first place. I am 50% sold cash beans and 0% sold corn. I am making some substantial sales this week.
These weather rally spikes seldom last long unless higher prices become necessary to ration the crop. I don't think we are in that situation, but if we sell too much this week, we can always take re-ownership later should we need to. This is why a brokerage account is necessary for most farmers.
The chart below for JJG (corn, soybean, wheat etf) clearly shows that these events tend to last only a few weeks. They are usually triggered by some sort of event such as weather, but not necessarily. I think the overall reason these events happen is due to a large number of short contracts held by large speculators, which in the rush of getting out of positions creates buying frenzies. Eventually the market runs out of buyers (green circles) and the sellers seize control again and the market driving prices back to where they were before (red lines).
Picking where prices will move is nearly impossible. My best guess is December corn will have resistance at the $4.20 area from last summers highs. At a minimum, you should sell 50% of your corn here and probably place some sort of sell stop below it say around $4.05 if you wish to gamble with the other half. I will be at 100% sold at $4.20
If 2018 corn reaches $4.30, I am pulling the trigger on 15% of the crop.
If you only sold soybeans when you had Commodity Channel Index sell signals, you would consistently be selling at the highs. We still do not have a sell signal on soybeans yet, but we will have one soon. What we have now is beans touching a major resistance level at $10.43. You should probably price at least 50% of what you have left to sell here. This will have me positioned at 75% sold. I think we could possibly still have another push higher to sell what you have left.
I am not yet ready to sell any 2018 soybeans, but we will have a CCI signal soon. Given the track record for selling at these moments, I will probably make a recommendation to sell...perhaps in the $10.30 area. Fibonacci extensions would take price to $10.44. Price should move in that range.