The crude oil short has been a long and suffering position to hold onto. Anybody who follows crude closely would not be surprised by 5% daily moves, but the loss Wednesday was abnormally large when compared to recent history. Long drawn out moves like what we were holding can produce explosive moves, and this move did not disappoint in that regard. Wednesdays move was the largest in more than a year.
After being stopped out several times, we finally got a short order to stick back on January 9 at $56.80. I was expecting a large move which is why I stuck with the trade. I had some clients stop out in February at $56.50. The next time the yearly cycle is due to bottom, I will probably recommend a larger stop.
When I outlined how this oil position would work in the context of grain back in December, I said you should expect a target of $51 as a minimum. We have already exceeded that target, and probably have a couple more dollars to the downside to go still. Sentiment Trader still shows sentiment readings at 43% bulls. This yearly cycle will not be complete until we have sentiment readings closer to 20%.
What all this means is that each oil contract which was shorted at $56.80 is now worth $6,470. Divide that by 17,750 bu of corn (explained on the December 30 post) and you would now be up .365 per bushel on this position. Combine that with the wheat put short back earlier in December and you would now be up over 70 cents a bushel on corn. These synthetic trades are a lot easier to make than trying to pick moves in corn and soybeans. Even with wider stops than we were giving, this would be safer than trying to trade grains in flat trendless years.
Much of my bullishness in the grains were based on the dollar. Just as oil is now trading into its yearly cycle low, the dollar is still in the timing band to move into its yearly cycle low. A year ago, oil and commodities traded into a multi year cycle low which produced powerful rallies in oil, grains, precious metals, etc. The dollar is now also in the timing band for its multi year cycle low. Unfortunately for grains however, this daily cycle we are in is right translated (peaked on day 19) which means we should not expect the dollar to move a lot lower until later this spring. Near term, however, we should expect the dollar to move lower into its daily cycle low. This might give us our last good opportunity to sell grain this spring.
I have yet to price a bushel of physical corn. I have made synthetic moves to try to boost price, but have yet to recommend selling a single bushel of corn. Since the August low last summer I recognized that corn would be in a grind higher into the price discovery period for crop insurance. I hoped to have some sort of sell signal happen in that time to pull the trigger on corn but there were no signals using the tools I trust and we are running out of time. Seasonally speaking, the months ahead don't provide the opportunities we need.
To make matters worse, for the first time since late last fall, corn and soybeans have made a lower low. Corn was stopped from moving lower at the 200 day moving average, but we now have a failed daily cycle and should expect lower prices for a few months. I would view any rallies from here on out to be selling opportunities. With the dollar set to move lower over the next week, and with a FOMC meeting just ahead, you need to have a strategy in place to sell some corn. A rally back to $3.98 should mean pulling the trigger on a large block of corn you expect to grow, or to consider the 3 way option strategy I laid out last month. If you need a brokerage account, click here.
Sentiment readings are not encouraging either. I am not seeing anything technical in the market besides a weakening dollar to provide the fuel necessary to push prices higher. The only thing I can see on the horizon would be the March planting intentions report.
Like corn, Soybeans also produced a failed daily cycle this week.
And like the corn, sentiment on soybeans are neutral.
So like corn, I believe that any rally moving forward should be sold. We could get a rally in beans this week depending on how the dollar reacts. If we get weakness in the dollar as it trades into its daily cycle low, that could push beans back to the 1020 level. If that happens, you have to make sales.