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.
Because the government shutdown cancelled out last weeks WASDE report, the grain markets really have not had a lot of news to trade on. Wheat has experienced a nice rally, but corn more or less has traded sideways since the end of September. This "coiling" effect tends to result in explosive moves higher or lower. When the time is right for a move, you will probably be very happy or unhappy, depending on your position. Below is the grain ETF JJG, which I use as an index for the overall health of the markets.
There are approximately 250 trading days in a calendar year. If you look back over the past three years, cycle lows have occurred 18 times. This means we should expect a rally out of a low about every 40 days.
We are now on day 56 of the present cycle......about 15 days beyond normal. When the government dickers with the market place by shutting down or delaying regular reports, this is to be expected I suppose. Had the normal WASDE report been released on October 11, we would likely be well into a new cycle already. As it stands, the market continues to coil within a larger symmetrical triangle. I have explained what these do on the terminology page.
Symmetrical triangles are usually continuation patterns meaning we should expect the price to continue lower. Because of the coil, I would expect the move to be strong. A sudden move such as that would push prices back into its next cycle low and become the start of a new cycle. Given we are already late in this current cycle, I am thinking this will happen very soon....perhaps as soon as next weeks FOMC meeting on the October 29 and 30.
The height of this triangle would be how far we could expect prices to fall. The height between 44 and 50 is 6 points. (this is actually 5.6 points to be exact). That would mean that the grain complex as a whole would drop a little over 10% from where we are today to 40.6 which is substantial.
Why would the FOMC meeting cause this type of move? The dollar cycle is in the timing band for its yearly cycle low and is currently trading at an area of significant support. I would expect this bottom to coincide with the FOMC meeting. This will probably result in a quick and powerful dollar rally that will pressure stocks and commodities, but will not be long lived. The reality of money printing will eventually take hold, probably when the dollar reaches its 200 day moving average and resume its journey southward into its 3 year cycle low sometime next summer. This should provide some better opportunities to price grain early next year, but there probably will not be many the rest of this year.
I will be posting some option strategies on the opportunities page in short order to place some sort of short term floor.
I want to speak a bit about the stretching that is taking place in the stock market. Today, I am not speaking about commodities per se, but markets in general and stocks. I touched on this briefly on the May 31 post about cycles. Lets apply this idea now to the stock market. The chart below shows that the stock market range as of late has been 410 points above the 200 week moving average.
We have been that stretched before....back in the late 90's. That market ran at a Ultimately, that did not end well.round 410 points for nearly two years. Ultimately, it did not end well.
Just like a rubber band, the more stretched the market gets, the stronger the reactionary move in the market. Following the massive sell of of the great recession, we have experienced the greatest cyclical bull market of all time!
I have mentioned numerous times that the bread and butter of professional traders is buying oversold assets and dumping overbought assets. This is called the "Regression To The Mean Rule". This is a principal among traders, that liquidity eventually finds its way into undervalued assets. Likewise, liquidity will eventually find its way out of overvalued assets. The pros have mastered the art of staying in these positions longer than any other person such as myself believes possible. It is agonizing for us who are on the sidelines of such trades to watch. At some point, we decide we need to participate, which is about the time the pro's decide to move on, leaving us dealing with large losses because we entered late.
Like I had mentioned earlier, this post has nothing to do with grains per se, but this is how the process works.
So, where will this liquidity go when the market turns south? Consider the chart below.
(You will need to zoom. If you cannot, try this link and scroll to the bottom.)
If you are around me very much speaking about markets, you may have heard me mention that the bread and butter of professional traders is purchasing assets at extremely oversold levels, and dumping them at extremely overbought levels. Back on April 21, I made two posts where I tried to make the case that the grain complex was at a bottom. (I urge you to go back and re-read) I was not attempting to create a bullish outlook, but really trying to point out that the market was at a place where it was likely running out of sellers. The pendulum had finished a massive swing to the downside which revealed itself on a chart.
This up and down motion in the market creates cycles. Any item that is trade-able creates cycles. Trading cycles are a recording of when traders believe something is oversold or over bought. On a chart, prices can look jagged and all over the place, but on a calendar, it looks more like this.
In a market that is consolidating, the price range narrows, but the cycles remain intact.
In the April 21 post, the grain ETF JJG was at the bottom of the cycle just in time for the weather market to begin. There would have been a lot more traders ready to enter the market long at that point. The biggest mistake I see farmers make selling grain is giving up at the bottom of these cycles or getting greedy at the tops. The emotions that lead to the greed or fear at cycle tops and bottoms lends itself well to selling at the bottom. The JJG chart below shows the bounce off the trend line which has produced the rally over the last month. (JJG is the corn, soybean, and wheat ETF I use as an index)
Whether you are a fundamental trader or a technical trader, you have to recognize the cycles you are in or the professional traders will steal your lunch money. We are still early in weather market trading, so we need to keep on our toes and be prepared to act quickly. At some point in time, the market will focus on fundamentals again. June 10 is the next WASDE report, which is only 6 trading days away. I suspect the market will bounce around randomly providing opportunities and missed opportunities until then.
Here are a few quick thoughts.
1. The CCI is not giving a buy signal on corn, but given the overall weakness of corn, especially with what happened yesterday, I would not consider selling corn. We did have a hammer doji yesterday which I think means we are at the bottom of a daily cycle and should have some price strength for a week to 10 days at least.
2. Notice how true to the fibonacci's corn (soybeans also) have traded.
3. The 200 day moving average has turned lower. Longer term, I expect weakness to continue.
4. The CCI is giving a buy signal on the bean chart, right at fibonacci support.
5. Looking at the bigger picture, the JJG grain ETF which follows the basket of corn, soybeans, and wheat is at support.
6. The entire commodity complex looks similar for that matter. Notice how well the CCI works to spot trend reversals? Also, we are in the timing band for a bottom in the commodity cycle. I will have more on that later. Large fund traders look at that.
7. The speculative money does not want to be in any commodities period. That said, there is no denying that the grain markets are over sold by any metric you use. The coldest spring in 24 years..... the latest start to planting in 17 years...... At some point, they will trade the weather.
The purpose of this post is to set the stage for the specific recommendations I am outlining on the Opportunity tab for upcoming marketing recommendations. Opportunities will be upon us shortly to make some significant grain sales to finish up 2012 and make a big dent in 2013 sales.
Let me first re-trace some developments that have set the stage for this opportunity.
1. Corn began its rally out of its intermediate and yearly cycle low. Big money follows these cycles, as traders move money from over-valued assets (stocks) into undervalued assets (commodities). That in a nutshell is what creates the cycles. If you have not seen the stock market lately, it has been on a tremendous climb since November 15, but it seems to have leveled off this week while commodities are beginning to take off. The three month charts below show tremendous gains in stocks since the November 15 low, but not so much in commodities. In the last week, commodities are up nearly 3 percent! It is simply a transfer of money from overvalued assets to undervalued assets.
2. Another driver into this situation is the plunge of the dollar. The scary tying is that we are still a week away before the dollar is due to reach the bottom of its daily cycle (the shaded area on the chart below). The current dollar cycle peaked on day 5 which means it is left translated cycle and the intermediate cycle peaked on week 2, so it is also left translated as described on the terminology page. As funds leave the dollar, they will pour into other asset classes and right now, commodities look more enticing than stocks. The dollar could bottom early, but still, we are looking at a failed daily and intermediate cycle. This is a big event that can move other assets. .
3. When you combine this with the fact that corn is rallying out of its yearly and intermediate low (as outlined on the previous post), and that volume on the grains have been incredible, I am reasonably sure this will be the fuel for the fire to push grain prices higher. I have outlined targets to make sales on the opportunities page.
I know I was a bit tepid on my confidence on the post I left Sunday, but we are getting more follow through today. I believe it is safe to say now that a new intermediate cycle began January 7. The break of the weekly trend line confirms this.
These intermediate cycles are the ones we want to be bullish with when they begin. Intermediate cycles usually last 32 to 44 weeks trough to trough (I mean over 69% of the time). There are 13 weeks from the beginning of this new IC until the March 28 planting intentions report. My guess is that the market will remain quite strong leading to that date.
It is always amazing to me how mathematically symmetrical the various charting patterns are. In the daily chart below, you can see the bull flag that has formed. Using the measuring distance of the base of the flag pole to the top of the flag pole, to complete as a bull flag, the price would need to move to 7.775, which happens to be at the small gap and resistance areas from back in September. That could be an actionable place.
Cycle wise, I hope this intermediate cycle chart makes a little clearer why you should not be so fearful at this time.
This is the same chart pulled in a bit closer with the last 4 intermediate cycles.
When I speak of cycles, I am sure it is difficult to follow their significance. To better explain the cycles, I have dedicated a page to following the cycle counts. If you can spend some time reading the charts and following the statistical analysis that follows, I think you can have more confidence in what I am speaking of. The link is here, but for future reference, I posted a link on the side bar. There are two stories....one for yearly cycles and the other for intermediate cycles. For how we use them, the intermediate cycles will be the most useful.
Now, just to refresh you on where we are in the current intermediate cycle, if you recall back on January 15, I posted a corn chart which explained that a breaking of the trendline would confirm the start of a new intermediate cycle. Technically speaking, we got the break last week, but we did not get the follow through I would like to see.
If we have started a new cycle, then the previous cycle lasted 30 weeks which is a tad on the short side. Cycles lasting 30 weeks or less has happened only 3 of the last 26 cycles, or 11.5% of the time. If we do not get follow through, I am going to say that the current cycle is now entering its 32nd week now. If that is the case, a new cycle begins 69.5% of the time when the cycle runs 32-44 weeks. I like our chances of a new cycle beginning soon, but we could see one more dip back below $6.78.