Parting is such sweet sorrow. We have had a great time the past 6 weeks pulling dollars away from some poor soul who tried shorting the market against us. It is time to begin taking the money and running. The first thing I am doing is raising everybody's stop on the ES to 2900 and on the NQ to 8900.
My style tends to get into positions early but also to leave early. I am fine with that. It has allowed us to capture the majority of this move. When we exit it and stocks continue higher it will feel like I got us out too early but there is really no way to know. At some point we just have to say "Enough".
Raising the stops is just a precaution. It is a safety net. We still need to pull the trigger to exit. Every person I am trading with has a different position size so there is no one size fits all approach I can offer. I am going to just leave it to you to tell me how you want to do it. I propose some suggestions:
1. If you only have one position. lets raise your stop tighter daily till the market closes you out.
2. If you have more than one position, lets start selling 1 or 2 positions daily and raise the stops on what you have left.
3. At any time, you can just tell me to close out what ever it is.
None of these are the wrong thing to do. Just think about it and let me know how to proceed.
My wife sends me 4 leaf clover pics all the time. She spots them from a mile away. It takes me a while to spot a 4 leaf clover if I am looking for one though. I have traveled in cars with hunter types of people who can spot a turkey or a coyote hundreds of yards away, yet I never noticed it. Their eyes were trained to spot the wildlife.
Look at this ES futures chart and think about what it is you see? it takes years of trading for your eyes to begin recognizing opportunities on a chart. I am still learning myself and will probably keep getting better at it the rest of my life.
Trading is never 100%, but if you do not have an expectation why would you take a trade in the first place? Trading cycles allows you to see opportunities and to set expectations.
The easiest cycle to trade is the stock market. Stock indices tend to continue to move higher over time. The Fed helps prop up the market which creates a lot of stability. Except for the occasional financial crisis or pandemic, stocks have done well over the last 80 years. Stocks are where we need to devote most of our time and resources to really make a lot of money over time.
Below is the same ES futures chart the way I see it today. This diagram shows what my eyes see when I look at a chart. This chart shows how the stock cycle was used to get us into the position where we find ourselves now and how we will use the cycles to exit and perhaps re-enter again later. Heads up..... it could be mid summer before we buy stocks again.
Gold is about half way through an 8 year cycle. The Bank of America estimates gold could reach 3000 over the next 18 months and I tend to agree. A 1200 point gain on a gold futures contract would be worth $120,000. Once the price of gold breaks above the $1923.7 all time high, gold will not have any resistance. Once gold enters this phase I think silver will do a lot of catching up to gold.
Metals are kind of the wild west of trading but over time do have dependable cycles. The metals sector is sometimes manipulated by bullion banks and hedge funds. The Fed has no reason to inject money into gold since governments around the world have fiat currency and not gold backed currency any longer.
Agriculture commodities do have cycles but they are nearly impossible to track in real time due to all the forces in play that create volatility. Seems like there is a USDA report, or a weather report, or something going on in South America that creates unforeseen volatility. Last weeks dive in crude oil for instance destroyed ethanol demand which directly impacts corn. There are just too many working parts for cycles to be useful with ag commodities.
Farmers are eternal optimists. If a bad year was a deterrent to farming, nobody would be farming. I had conversations with several farmers this week who are beginning to sound scared. I have had many conversations through the years with frustrated farmers who thought prices were too low, but this is the first time I have perceived their fear.
Despite what many farmers believe they tend to do a terrible job selling grain. We know that most farmers sell grain at the bottom 1/3 of the market. Advisory services that promise to sell grain at the top do not fare much better, typically selling just below average. This is why "equalizer" types of contracts are good. Farmers just cannot sell when prices are high because they always believe prices are going to go higher. It is not so much a fallacy that farmers sell grain near the lows but that humans are hard wired to make bad decisions at the worst time, and farmers are human. Now is one of those times where you can do terrible harm to your farm selling grain.
I believe we will see higher grain prices soon. I believe, barring something crazy, that the lows are in. I have some strategies I will recommend later which should help your cash flow and put you in a better position with any of last years crop that you have not yet sold, and for the new crop you are putting in the ground now.
For now, I want you to look at where we are in this grain cycle. This is corn since December 2013 meshed with a sentiment subgraph. This terrible sinking feeling you have as a farmer is sentiment. Sentiment values today are at 19. The only time sentiment values have been worse in the past 7 years was in late 2017 when sentiment values reached 15. The main take away from this chart is this. Every major rally began with extreme bearish sentiment.
Oddly, back in 2017, the extreme bearish sentiment occurred in November but it is normal that we reach extreme bearish sentiment at planting time just ahead of the weather rally.
Seasonality wise, May normally gives you the third best marketing opportunity of the year. Safe to say we did not get an opportunity in March to sell corn. May usually gives a good price appreciation.
April 24 marks day 115 of 2020. In an average year, corn would appreciate 4.41% by now. So far this year, corn has dropped 20.73%.
I have heard at least one expert say we are not technically oversold. True, we could get more technically oversold I suppose but this weekly corn chart shows price is at extreme oversold levels on the RSI and Stochastics. We are much more oversold now than we were a year ago when corn prices suddenly shot up over a dollar to $4.60. The weekly RSI readings have not been this oversold since 2014.
Things can get oversold and stay there for a long time as it did back in the fall of 2017, but this is not about a market that will be trading supply and demand. This is about an extreme oversold market that regularly rebounds during weather scares. You can almost count on it. Every major corn peak the past 6 years has occurred in May, June and July.
Knowing this, why would a farmer sell grain now? Why not wait a month or two when the likelihood of a strong rally is so great? Possibly fear of prices moving even lower, and to raise some cash flow. We all know the fundamentals are bad this year, but the worst years always have some sort of snap back rally. Revision to the mean is the bread and butter of all professional traders. At some point the market will come back to average.
The 200 day moving average is the most commonly used indicator of an average price. I think over the next couple months we will have a rally that is stronger than most analysts would predict that should bring price back near average. A 50% retracement from the contract high would bring corn to $3.75. A 61.8% retracement would bring the price of December corn to $3.86. That is the price range where I could see corn rally to by early summer.
As crazy as that sounds, remember that there has been no weather premium put into the market yet. Once traders begin looking at weather, it does not take but a few traders exiting their short positions to trigger a massive buying frenzy.
So a cash strapped farmer has 4 choices the way I see it.
1. Sell corn for cash - the worst possible thing
2. Basis Contract - Collect 70% of the cash price today
3. Sell corn for cash, then buy December Futures.
4. Sell calls (new crop)
The only reason you should consider selling cash is that you believe futures and basis values will both decline further for months to come. December corn has already dropped 20% from contract highs. I guess theoretically it could follow oil down to zero or lower but that is not going to happen now while the new crop is mostly still in the bag. Maybe this fall if there is no place to put the corn the price goes to zero, but I suspect nobody will be harvesting any corn if that happens. Of course, to collect on the crop insurance farmers would have to harvest the crop which would be a different problem altogether.
Basis levels are very high now. They would be much higher if ethanol plants were operating at full capacity, but basis levels are still at historically good levels. Basis levels in Louisville for corn are around .20 over May right now resulting in a cash price of $3.38. You really need to get this locked in. If futures rise 50 cents, we could see the basis drop to -.10 or lower. The two best ways to lock in these basis levels would be with a basis contract or by selling corn for cash and buying futures.
Basis contracts would be a very good alternative. You would collect 70% of the current $3.38 cash price now, giving you around $2.35 a bushel to operate with. If we get a 50 cent rally over the months ahead, you would wind up netting $3.88 for your corn when you price the futures. You do not need a commodity account to do this.
Selling corn for cash and buying futures would require you to have a commodity account. You would go ahead and sell at the cash now and collect $3.38. You would then buy any futures month you wanted. I would suggest going out to December. Margin on a corn futures contract is $1100 which is .22 per bushel. This creates more cash for you than the basis contract UNLESS the price of corn drops. If that happens you would have margin calls to make. Meeting the margin calls is what the elevator does with that 30% they kept out of your check when they paid you on that basis contract. If corn goes up 50 cents like I think it could, you would profit the same with a futures contract as you would with a basis contract.
A farmer could generate some additional cash by selling $4.00 December corn calls for 8 cents and selling $3.00 December corn puts for 8½ cents. This results in a breakeven on the trade at $4.16½ on the upside and $2.83½ on the downside. (this is assuming you carry a crop insurance revenue policy that gives you a floor) This would cap your potential gains on the corn market at $4.16. If prices remain between $4.00 and $3.00, the options would capture the 16½ cents. It's almost like free money.
I have a similar strategy to use on soybeans that would allow you to capture over 20 cents. If something like this interests you let me know and I will send it to you.
In summary, we need to be smart with how we start the year so that we can finish out the year strong. Every year, farmers leave dimes, quarters and more on the table and survive anyway. This year we can't afford to do that. Lets do some things to capture every nickel.
I was looking at gold and studying why it is lower today. I noticed that just before 10:00 this morning that somebody had dumped 8707 contracts. The metals contracts are heavily manipulated and it would appear somebody wanted to try to keep gold pinned below 1750.
So now I am not so sure if 1800 will be a real possibility this daily cycle. I am tightening up stops to 1730 on all gold positions.
When the market opened yesterday evening I noticed the bonds were opening higher and the VIX had opened above the 10 day moving average. Those would be the top two charts in the below photo. That should be a warning that fear is once again coming into the stock market.
I wondered if that was a warning sign that we would be getting our half cycle low. Looking at the Bonds and VIX chart a day later (the bottom two charts) you can see that the bonds and the VIX appear to be closing off their highs at the same time stocks are up off their daily lows. This is probably a sign that the half cycle low was made today.
Gold is on day 23 which is too early in the timing band for a daily cycle low. 30 to 50 days would be normal. I think what you are seeing is a half cycle low. A half cycle low will cause the 3 day RSI to become oversold which it has. Price has dropped into the 1700 area which has served as resistance multiple times in the past but will now likely serve as support.
Half cycle lows serve an important function. Besides becoming a potential place to add a position, they allow us to construct the daily cycle trend line. This will become important later as I will explain in a bit.
Gold has been in a very long basing pattern since the all time highs in 2011. Gold made multiple attempts to re-gain the highs in 2012 but all failed at 1800. Again 8 years later we find gold knocking on the door of 1800. We are probably entering the second half of the daily cycle. It will be very unlikely that gold can break through 1800 in the later stage of a daily cycle.
Gold is in the first daily cycle in this intermediate cycle. Though I don't think gold can break above 1800 at this time, I do think there is a good chance we break through on the second daily cycle. Once that happens it will probably be a quick trip back to the all time highs at 1923.
A 40 day cycle would mean we would see gold bottom around May 11 probably near the 1700 support area. At this point we would begin a new daily cycle. With sentiment levels re-set early in a daily cycle I think there would then be enough energy for gold to reach the all time high of 1923. At that point we may have to endure an intermediate cycle decline before we break out to new all time highs.
For now, you could take a long in gold around 1700 with a stop just below that area and just plan to exit the trade at 1800. a 100 point gain in futures is worth $10,000. There are micro gold contracts (MGC) as well that are 1/10 the size just like the index funds many here are trading. There is also SIL which is a silver contract that trades at 1/5 the size of a silver contract.
I know my post this morning made it clear that I am not recommending any more stock or metal trades. Below is a chart of the actual NASDAQ composite index. It shows clearly that the NASDAQ cleared the 50% Fibonacci retracement and blew threw the 200 day moving average. Today was day 15 of this new cycle. I can't believe we could roll over as a left translated cycle with the government throwing trillions of dollars at the economy. I anticipate prices continuing to move higher.
Today was a very STRONG day. QE is a big part of what is driving this recovery but I also think the market is starting to recognize that Trump is putting his foot down and ordering the states back to work. To be at the half way point this early in the cycle makes me believe we could reach all time highs in this first daily cycle.
There is still the very real risk we get the half cycle low. If we do, you will appreciate the fact that I discouraged you from buying today. If we don't get the HCL you will probably be upset with me that I did not get you in. Buying early in the cycle keeps you from having to make these kinds of decisions at the half way point. Personally, I am hoping for the HCL because I would like to own more NQ. I will be ringing the bell when I think we are at a point where it makes sense to start a new position or to add to your positions.
I don't think the S&P will not reach the 200 day moving average this week but we could well be at this point a week from now. I think the 200 DMA is where we will get our HCL.
This is a learning opportunity to help you understand why I incorporate cycle analysis into my trading. Cycle analysis helps me step on the gas when we need to buy and it helps me tap on the brake when we need to begin being cautious. Cycles allows me to think rationally about timing. Cycles keeps me from making bad decisions.
I first began making stock buying recommendations back in March. The bottom of the market happened on March 23 and I made my first recommendation on March 24. I made a second stock buying recommendation on March 30. I like buying early in a cycle because if I am wrong, I won't be very wrong. The risk is easily managed by placing stops just below the swing. Today as I write this is day 16 of the new daily, intermediate, yearly and 4 year cycle. The stock market has already rallied 29.7%. The frothy part of the rally has already disappeared. The market will probably go higher, but I won't be making stock buying recommendations the rest of this daily cycle unless we get a clear half cycle low or until the next daily cycle begins.
I am not a machine. I am human. Each of us are human. In hindsight, it is easy to see that we should have spent every dime we had and bought on March 24. We were scared out of our wits though and not many were able to pull the trigger. The large speculators and investment banks were buying, but us dumb money traders could not overcome our human state and buy when we should have bought.
Today, stocks are on day 16. A typical stock cycle is 35 to 50 days long. It normal to get a half cycle low, but a move this strong might not produce a HCL. I won't be making any recommendations now to buy stocks or any metals. Most of you took the stock trades I recommended and are making good money, but we need to begin transitioning from controlling our anxiety to controlling our greed. I am getting a lot more interest in stock and metals trades now than I did back when I first recommended them. The same emotions that would not allow you to buy the stocks at the bottom are now pushing you to buy them near the top. These are warning signs for me.
My plan is to stay the course. I have tried to keep stops loose but above our costs so the market volatility doesn't knock us out. I will keep pushing the stops higher as the market moves higher. Eventually we will get stopped out, and probably not near the top. I won't know in real time when that will be.
So in summary, buying now while you are feeling like you are missing out on the move is a lot riskier than it is when you are scared of buying. The cycles help us manage these emotions so we don't make bad decisions. If you want to buy something now, it is up to you to determine how you will manage that risk.
It's been a while since I posted the sentiment heat map. This is the reddest I have seen it. The items in red are at extreme optimism levels while the handful of green assets are at extreme pessimism levels. No surprise here to see that most of the assets in green are ag related. The meats in particular should have an exceptionally strong rally once this corona virus stops shutting down processing facilities.
In case this is your first time seeing this, many of the names are ETF's. SPY is the S&P 500 ETF. Some are somewhat repeated. For instance, you could have gold the commodity and you can have GLD the ETF both listed. Nat Gas and UNG, the ETF are listed....etc. I can send you the individual sentiment charts for any of these commodities if you are curious.
An asset can remain at an extreme level for a long time, so sentiment is not really useful as a timing tool. It really just senses the temperature of the market. The sentiment values are but a tool to use along with the cycles. Some assets, such as soybeans, just stay oversold all the time. That said this market is not normal. The market would normally have about the same number of assets showing extreme optimism as they do extreme pessimism.
The Speculation page is used for educational purposes and to talk about our opinion on trades and what is going on in the market. All trade recommendations are made in "The Pit". This is also a blog page where you can ask questions, post your thoughts, or ask for help. Be sure to use an anonymous name. If you have any questions feel free to reach out to us via email.