Preparing For The Next Synthetic Trade

Crude Oil finished day 2 of its blood bath stage which will mark the end of this intermediate cycle which began back in November with the Trump election.  A blood bath stage in commodities is the period in which capitulation occurs.  Its a sentiment cleansing event which will punish the longs.  All the bulls are trying to exit the oil market at the same time which will end in extreme pessimism and the market running out of sellers. 

​In early May, ​oil had a selling event which only lasted a day.  You cannot push a commodity into overbought or over sold territory in a day.  It usually takes 5 to 7 days.  You have heard me say it before, but the rally out of this intermediate cycle low will have the potential to be very large....one that could take oil quickly back to $52-54 which would only be at the 200 day moving average.  The last rally out of an ICL back in November took oil up $13 on its first daily cycle.  If this cycle bottoms at the 39 or 40 level, a move back to the 200 day moving average would be on par with that.

The problem the last time I recommended the strategy was that we did not have pessimism at extreme bearish levels yet.  We still do not have the pessimism today we need for me to recommend the trade, but we should at or below 30 after another 4-5 days of this sell off.

If oil rallies $13.00 in a synthetic trade, it means a 1,000 barrel oil contract made $13,000.  Equalizing the margins of oil, corn and soybeans, we would see a $.82/bu benefit for corn and a $2.02/bu benefit for soybeans.  Now is the time to check yourself and see if this is something you have the stomach for.  Barring a major weather event, I doubt we see the kind of rally you will need to get the price of corn and beans to profitable levels.  If you can make $4.00 corn and $10.00 soybeans out of this market, you must have a darn good basis someplace.

​As with any trade of this nature I recommend, there will be stops in place to manage the risk.  One thing I am learning is to make the stops wider to allow for volatility so we are not swept out of our positions.  Still yet, the risk will be relatively low and the reward very high.  I will be diagramming the trade over the weekend, so expect a follow up post to this one then or early next week.

​If you need a brokerage account, you should open one this week.  This link will take you to where you need to go to open one with RJ Obrien if you wish to open one with me.  You won't need to fund the account until you make the trade.