I don't wish to use this as a forum for patting myself on the back, but I wish to pat myself on the back. I first wrote about the opportunity for a commodity rally back in December. As I visited farm after farm this winter on crop insurance visits, my message was the same..... that we were going to have a powerful rally in the grains which would be fueled by massive short covering by the funds, meaning speculators would have to buy.
Just to recap, back in March as I was making the farm visits, I gave everybody this chart of the CRB index which showed that commodity prices had not been this depressed since 1973. Professional traders love these extremes to reverse positions. I told everybody that despite poor fundamentals, grains would rise with all commodities because of the short covering which would have to happen. This is why I was recommending price flex so strongly on crop insurance policies so that the price discovery window would be opened back up, rather than crop insurance guarantees being set at the lows of the market.
So in the 6 weeks since this first CRB chart was printed, oil is marginally higher than it was but now the grains and precious metals have rallied. Yet, the CRB has still only bounced another 10 points since March. The point is, all commodities still have a lot of room to rally.
Corn nearly reached a 50% retracement yesterday from the July high but pulled back today to the 200 day moving average. Still, that is a 50% retracement in just 3 weeks time.
Soybeans have also rallied to a 50% retracement of their July high. My recommendation to sell at the $9.75 level was because beans had moved into the 38.2% retracement. The magnitude of this move surprised me, and I was probably the most bullish person I knew. You would think that the drought of 2016 had been underway for a month, and very few have even planted soybeans yet.
Sentiment on corn and soybeans would indicate that they still have room to run higher so don't fall into the trap yet of thinking they are as high as they are going to get. My expectations for the new crop have actually become even more bullish when you factor in strong fund buying with the possibility of weather problems. The charts below are not a forecast, but more or less an idea of the time frames and price levels I am speaking of.
First, we get a bounce of the dollar through early June taking the dollar to this downward sloping trend line. (This is a wild guess because the currency markets are so heavily influenced by central bank tinkering.)
Now you have multiple things which can fuel a summer rally in June. A falling dollar, unfavorable weather, reset sentiment, and more short covering from the funds.
I wish to point out that picking the bottom a couple months ago was easy because of the extremes. There was really only one place for commodity prices to move which was higher. Now they have moved higher even faster than I could have ever imagined. Picking tops is just impossible to do so I am going to be wrong.... I already have been. Past performance is not an indicator of future results.
Today, prices are somewhere between where the low of the market was and where the high in the market will be. Moving forward, my plan is just to point out actionable places where making a decision to step on the gas or tap the brake will be prudent.
Some of these recommendations will require a brokerage account. If you do not have a brokerage account, I can help you with that.
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.
I am aware that we are in for some volatility the likes we have not seen since the Great Recession of 2009. This will be a period where what gets done today will seem right, will seem very wrong in a couple weeks, and will again seem like the right thing to do in a month. Unless you want to day trade your position, you will be on the wrong side of your position from time to time. This is where marginal positions will be most taxing on your psyche.
There are a lot of things happening across a broad range of markets, and this is what is giving me some encouragement. No, we will not see new highs, but the grain markets have refused to collapse despite many other outside markets collapsing. When some of the corresponding markets find a foot hold, I think we will get the bounce needed to make some grain sales.
Let us begin by looking at the Dollar.
The dollar printed its daily cycle low on Tuesday, so we now in the beginning of a new daily cycle. The type of move we had Wednesday puts a lot of pressure on stocks and commodities, however then entire grain complex held up well. The dollar is now trading towards an intermediate cycle low between May 10 and May 24. We want to have grain sales made prior to the next collar cycle bottom.
There are three ETF's that I watch which are an important index for grain farmers. The first is DBC, which is the basket of all commodities, including lumber, copper, oil and ag commodities. DBA is the second I watch, and is comprised primarily of corn, soybeans, wheat and sugar. The other is JJG, which follows just corn, soybeans and wheat. The third and newest is JJG which is just corn, soybeans, and wheat.
What I would like to point out on DBC is that within the entire commodity complex, we are at an area of support spanning three years. Commodities have yet to confirm a bottom, but are in the timing band for a low. Besides that, DBC will be forming a buy signal on the CCI oscillator. This tends to be a pretty reliable trend reversal tool.
Agriculture DBA shows an even longer trend line support going back 4 years.
The grain only ETF JJG is chart is from the shortest period of time, but also shows a truer trend line in my opinion with 4 touches.
When a trend line fails, it marks a change in the market place. Something becomes different that was driving the market. This trend line could hold, but the exodus of funds holding any commodity could be the driver that breaks the trend. I am nearby neutral, long term bearish, but short term optimistic. This should provide the opportunity we have been looking for to get some sales on the books.
After being away the last week finalizing crop insurance decisions with farmers last week, I am ready to get back to my second passion of analyzing commodities and thinking about how to protect prices. Thank you for your patience during this critical time.
Oddly enough, prices the past week behaved as if they knew I would be too busy to notice, so the same trends are still in place for the most part as in my last post. The dollar continued higher for the 5th week in a row while grain prices stabilized.
Ordinarily, one would expect to see the dollar decline into a cycle low before now. The gray area on the chart below indicates a normal cycle timing band. Depending on the charting service you use, Saturday could have been the daily cycle low, but barely. Fridays trade did break the trend line which should confirm that a bottom is being made in the dollar right now, but just barely.
If indeed the dollar cycle bottomed on Friday, I would expect the dollar to continue upward, making a higher high over the next two weeks which won't give much of an opportunity for a rally in the grains. If we can get some follow through and a dollar drop.....say to the 81.30 -85.50 area, we could get the bounce we need to get some substantial grain sales made ahead of the March 28 planting intentions report. Because this cycle has lasted longer than normal, it would not surprise me that the next dollar cycle is shorter than normal.
There are some bullish rumblings out there for the old crop which should lend itself to some support.
· There has been more talk that China is looking for US soybeans due to slow load-out in Brazil
· Nearby corn firmed following Valero’s announcement that they would be running near 100%
capacity in their ethanol sector
· Some rationing concerns are being talked about as early harvest will be later in 2013
· There is some potential frost damage to the Argentine bean crop, yet to be confirmed
Some grain sales targets are forth coming this week.
Grain prices keep working lower. When will this end? When will we get some sort of bounce? Back on the 25th of February, I posted a chart which correlated the recent rapid decline of corn with the dollar. This is still in play. While it is painful to sit through, keep in mind that it is dangerous to chase any run away move once the train has left the station. Just ask the folks that bought Apple Computer stock when it was trading at 700.
All run away moves eventually pull back into a reasonable area because the market will simply run out of buyers. When people stop buying the dollar, the big boys will sell their positions, leaving the rest of us who bought the dollar or sold our commodities holding the bag. That is the way it has always worked in the past and it is the way it always will work in the future. Look at how oil, gold, silver and most any other commodity have traded recently. This is the same dollar chart I posted last week with the corn against the entire commodity complex.
We can credit all the bad news you have read to price action you want, but the bottom line is that this is about money flows.
The fundamentals on wheat however continue to deteriorate. USDA Chief Economist Glauber is forecasting a record 13/14 global wheat crop. Despite the poor wheat crop out west, you cannot deny that world wide, there appears to be plenty of wheat.
Just this week, wheat began trading at a lower price than corn. I have never seen this happen. Today, wheat touched the price floor for those who took 80% RP insurance. The chart below shows the wheat chart with corn in magenta laid over the top. Notice how wheat traded right to the $6.86 80% crop crop insurance floor.
My suggestion at this point is to let somebody else get creamed by the big boys and sit on your hands for the time being. If you have an 80% revenue crop insurance policy or better, allow the insurance to carry the risk for you and do what you meant for it to do when you bought it.
For those with old crop beans.....this could be your final chance to get $15.00 beans sold. Prices have touched this level 4 times now since prices broke lower on November 1 and have not yet been able to close above that price.
There has not yet been the first kernel of corn planted, nor has there been a planting intentions report, nor has there been sufficient rain to ease the strain of extreme drought in the mid west, yet the corn market continues to bleed based on forecasts of an extreme buildup in the carryout. Could there be something else here at play?
I believe the shorter term bearishness is explained by the strong rally in the dollar, and as far as the dollar goes, it is in the timing band for a move back into its daily cycle low. I think this will provide the fuel the corn market will need to hit some minor objectives (I believe minor is all we are going to get) to finish selling old crop futures and to get substantial new crop corn sales made.
Some other tools in my tool box are also pointing to key support areas being lost with corn. Below are what are called point and figure charts. In a nut shell, they plot day to day price movements without the consideration of time. The X's show price increases, and the O's show price decreases. Only price movements of significance are plotted. Small daily scribbles are filtered out. This creates a chart which is a lot clearer with much of the clutter removed. What you wind up with are pure support and resistance levels. If you are interested, you can see how the price objectives are calculated here.
The December Corn chart shows a bearish price objective. of $5.10 and the March shows a bearish price objective of $6.30. Keep in mind, we will most likely run out of time on the March for this objective to be met.
There will not be a great opportunity to sell, only a minor opportunity when the dollar stalls. I suggest you get your plan ready.
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.
A quick post on corn. We should have new buy signals from the RSI tomorrow or Friday. Corn closed today just above the 150 SMA.
Wheat did manage to close just below the 150 SMA, but the RSI will likely give a buy signal again Thursday or Friday.
The dollar showed some strength today. Despite the weakness in the dollar the past month, commodities have also shown weakness. I will be curious to see how the grains react while the dollar makes its mid cycle bounce.
As long as these moving averages hold, I remain bullish.
There are numerous tools available to help make marketing decisions. Obviously, some are more effective than others. The big problem with technical analysis is that once a fool proof method is discovered, the market makers make sure it won't work forever. I am not married to one particular method over another, but one which helps greatly is cycle analysis. For example, I like taking the dollar chart and comparing it against the corn cycle.
We just so happen to have a new failed dollar cycle. This means we should expect the dollar to trade lower into its next expected cycle bottom, which regularly happens in 18 to 28 day intervals.
Using cycles, you would estimate the dollar would now trade lower for the next 9 to 19 days, or about 2-3 weeks into its next daily cycle bottom.
There are daily cycles (short term), intermediate cycles, yearly cycles, and the three year cycle. Once a daily cycle fails, this signals an intermediate cycle decline. I happen to believe this drop will magnify, taking out the previous intermediate bottom and possibly even the yearly cycle bottom. Bernanke has the printing presses going at full steam, which should result in a waterfall decline into the dollars yearly cycle low. Once that bottom is reached, you should be ready to make some advanced grain sales.
So what does this have to do with corn? Since 2003, there have been 9 yearly cycles ranging in 9 to 18 months each counting the current 14 month cycle we are on now. That means the average cycle bottom to bottom is about 12.5 months. Suffice it to say, we are in the timing band for a bounce now. See the bull flag?
With the expectation that the dollar is beginning to drop into a new intermediate cycle low, and corn in the timing band for a bounce, the cycles alone would tell me this is not a great time to consider a large corn sale. Technical analysis gave a buy signal on November 16, which happened to be the low on corn when the CCI and RSI gave buy signals as price also had a near touch of the 150 DMA with a hammer doji. It just does not get any more bullish than that. You won't see the CCI give another buy signal on the corn again, but another touch of the 150 sma adn the RSI will again give a buy signal.
How high corn can go is really not answerable. At the very least, $6.60. The real question is when. A rally of corn into late February (which corresponds with a waterfall decline in the dollar) will likely carry corn higher than that.
Soybeans gave a clear buy signal as well. Not that you would ever buy soybeans or corn for that matter, but these kinds of signals are a great opportunity to sell some puts, which is a bullish strategy. On November 16, I recommended selling the at the money February put with a $13.90 strike to collect .50 cents. We should see soybeans at $14 very soon.
I realize the grains have been lack luster this past week to say the least which is unusual considering the dollar had fallen all week as well. The dollar fell below its previous daily cycle low. With 11 to 21 days remaining until the next cycle bottom, we could see the dollar reach the previous intermediate cycle low set back in September.
Despite a lack luster week in the grains, neither corn or soybeans broke key technical areas. By far, the weakest of the grains was wheat which started off this past week sharply lower, eventally breaking below support. A further drop to the $8.12 area would provide wheat with a 38.2% retracement, and would not only pull wheat very close to the 200 DMA, but might also trigger a buy signal on the CCI oscillator. I remain very bullish wheat.