We recommended a bond trade on February 8 which did not work out so well. This was right at the point where the bonds really fell off the edge of a cliff as bonds dropped into a yearly cycle low. Today, the bond is the most oversold it has been in the past 20 years. Bonds have also formed a swing low this morning.
Weekly stochastics and RSI indicators also very oversold.
This chart shows that the 21 DMA is at the bottom 1.7% in history.
The optimism index has been imbedded in the oversold level now for months.
The trading strategies we usually recommend are not working well right now. Things were difficult leading up to the election and I really thought regardless of the outcome things would get easier. They just have not.
The success of our trading system is the ability to limit risk with stops while letting a good trade go. The volatility means we can never set a stop that will work. There is something else we can try. I am not an options guy. I seldom recommend them but I think in the right circumstances they can work.
80% of all options expire worthless. The one time options buyers have an edge is at Intermediate cycle lows. Some ICL's are not that obvious but the destruction in the bond market is not a daily cycle low. Bonds are clearly finding an ICL right now. This is a time when you can make a LOT of money buying options.
One reason I don't like options is all the moving parts that determine what the value of an option is. The primary 3 variables are the intrinsic value, time and volatility. There is not a volatility index per say for bond options like there is for stocks, but believe it or not the volatility in the stock market is considered low according to the VIX. This means that the cost of options is "not expensive."
Below is a stack chart with the top row being the June 30 Year Bond and the June 10 Year bond. The bottom charts show the corresponding options you can buy There is not yet enough volume to create a smooth chart but I want you to get an idea of how these move. Of course, bonds have been dropping all year so the options would naturally drop, but the magnitude of the drop can change wildly due to all the variables (moving parts) that I mentioned earlier. If the bonds turn higher, I would expect similar moves in the opposite direction. Throw in a spike in volatility and you can make 100% in a few days. The pink lines correspond the trading day on the bond with the trading day on the option.
The bond market seems so damaged it is difficult to guess how high the bonds could go and likewise the value of the calls.
Here is how this would work. I would recommend that you buy the June 30 or 10 year bond. At the bottom are the corresponding charts with highlighted target areas.
Obviously between the two, the 30 year looks to have more value than does the 10 year.
The bonds could reverse at any moment. If you take this trade and it takes one more leg lower like a lot of trades seem to, you will not be met by any margin calls, making this an easy trade to hold onto. We will not use stops with the options. Options are kind of an all or nothing bet. if something suddenly happened we could jump out quickly but expect to lose a majority of your premium.
As a side note, there is a possibility that the Fed could begin buying bonds as a way to stop the hike of interest rates. They will call this YCC for Yield Curve Control. You can read more about this here. https://www.bankrate.com/banking/federal-reserve/what-is-yield-curve-control/#:~:text=Yield%20curve%20control%20would%20provide,set%20by%20the%20Fed%20low.&text=The%20unconventional%20tool%20would%20also,low-rate%20promises%20into%20practice
And there is always just buying the board like we usually recommend.
The margin on the 30 year bond is still $4400. We recommend buying the June 30 year bond with an entry limit order at 155'16 and a stop at 153'16 which is risking 2 points, or $2000. The ICL trend line is near our target of 166 which is 10.5. points away from our entry point. Each point on the bond is worth $1000, so you are risking $2000 for the opportunity to make $10,000..... good for a 5X1 risk reward ratio.
We have been slow to recommend ag commodities which has been a mistake for the most part but we are coming around. We believe the ags are in a bull market and the overall trend is higher. This should remain in place this year even if the US grows a large crop. This does not mean we are ready to buy grains today however as they are presently quite stretched.
Soymeal is a high-protein feed supplement for livestock and it is consumed most heavily by livestock in the cold of winter. In the spring, consumption begins to decline. With an eye toward harvests in South America, US meal producers sharply curtail production leaving end users competing for a smaller stream of production and from smaller supplies of old-crop soybeans which were drawn down by heavy use during winter.
The symbol for soybean meal is ZM. Despite making a 6 year high in early January, ZM has seriously lagged corn and soybeans. ZM had a good run last fall but has drifted lower so far in 2021. The price has dropped below -200 on the Commodity Channel Index (CCI) and has formed a hammer doji on the price chart. Once we have a swing low in place and the CCI comes back above -200 we will have a buy signal.
The 5 day RSI is deeply oversold.
The weekly charts are oversold as well. In bull markets, commodities can remain overbought for a long time but they tend not to be oversold very long. While the RSI made it quickly to oversold, the Stochastics probably are not going to. ZM has been in a terrible bear market now for many years but the 200 Week Moving Average has turned up signaling it is now in a new bull market. Oversold conditions need to be bought.
In additional to the technical reasons why now is a good time to buy ZM, Moore's Research also believes history is in your favor. ZM has appreciated in 13 of the past 15 years when bought March 16 and held through April 2. The 16th is on Tuesday. The average profit on winning trades has ben $863.
So most of the planets have come into alignment for this to be a profitable trade. The plan will be to buy the July ZM contract once it makes a swing low, so we will be trying to buy very near the bottom. We would expect this will come Sunday evening or Monday, which will be a day early.
The ZM margin requirement is $2310. We will buy the July ZM at 405.7 with a stop at 395 risking 10.7 points. The minimum target will be $458.2 giving us a potential profit of 52.5 points. This is a 4.9 to 1 risk to reward ratio. Each full ZM point is worth $100, so we are risking $1070 for the opportunity to make $5250.
The largest gain in this time frame was in 2014 when the trade made $3480. In the environment we are in, it is logical that we think bigger. All ag commodities are moving fast and moving big, so it is OK to think big with ZM as well. (I did not say go big)
Just to be clear, there will not be a buy recommendation on soybean meal until we have a swing low.
All of the stock indexes have now made swing lows today marketing day 1 of a new trading cycle. This cycle should run the next 35-45 days.
Their are a few catalysts to move us into this new daily cycle, the $1.9 trillion stimulus package passed through the Senate this weekend and will have no problem getting passed in the House tomorrow, the fed continues to promise easy monetary policy to speed economic recovery, and the latest employment situation report showed that nonfarm payroll rose by nearly twice as much as projected last month pointing to the economy reopening.
We usually use the S&P for marking cycles in stocks but not this time. This decline was very mild in all the indexes except for the NASDAQ. In fact, you really could not call this anything more than a daily cycle decline if not for how deeply the NASDAQ sold off. One of the things we look for to mark an intermediate cycle decline is failed daily cycle which happens when the price drops below the previous cycle low. You can see on this S&P chart that it did not happen.
The selloff in tech stocks however was severe enough to give the NASDAQ a failed daily cycle. Because the NASDAQ had a failed daily cycle at week 23, which is in the timing band for an intermediate cycle low, we are going to say stocks have begun a new intermediate cycle.
Wednesday and Thursday's panic sell off was followed by a buying frenzy on Friday. Not easy to see the colors on this chart but we got follow through with the swings this evening.
The volatility in all the stock indexes has made it very difficult for us to hold onto our positions. For this reason, we are recommending that you take the volatility down by trading smaller positions with looser stops. We are also recommending that you keep your stock index trading in the Russell 2000. The margin requirements are also much lower, yet you will get more bang for the buck than trading multiple micro mini contracts.
We recommend buying the RTY at 2200 with a stop at 2150. You are risking 50 points (50 X $50 = $2500). This cycle was so mild, my expectation will be to see the RTY take out the previous cycle top and advance to $2460 which would be at a Fibonacci extension level of 161.8% That would give this trade a 260 point gain X $50 or $13,000 for a better than a 5 to 1 risk reward ratio on the trade. By avoiding the NASDAQ I think it should be easier to hold onto our position. Margin on a RTY is $7,150.
Platinum certainly has its scary moments, but it is not manipulated in the way that silver is. Silver will have its day but it has been incredibly frustrating to trade. The industrial metals have out performed the precious metals over the past year and Platinum gives you exposure in both markets really. It also has the added benefit of a much smaller margin requirement of only $4,840 vs $18,150 for silver.
Again, I believe any of the stock index or metals trades will work now, but I believe the Russell 2000 and Platinum will be the easiest trades to hold in this volatile time.
I have been looking for an opportunity to get us in energies but with the OPEC+ meeting being yesterday and there being talk of them increasing output as economies reopen I was hesitant. In a surprise decision OPEC+ decided to keep production where it is, this is incredibly bullish for energies with production already being cut to boost price the only place for price to go is up as demand increasing in reopening economies. This news has sprung us into a new daily cycle in energies with today being day 2 of a new cycle in oil, day 3 in RBOB, and day 3 in heating oil. We track energy cycles using oil as the benchmark for all energies, as you can see below they trade with similar time cycles. These daily cycles in energies typically last 35-45 days meaning we should be looking at a price rally for the next 6 weeks.
This timing coincides well with Moore's data which has July crude oil as a profitable long trade 14 of the last 15 years with an entry date in mid March. We are entering this early according to Moore's but the news from OPEC+ is going to be a large price boost.
These production cuts are a big deal because as spring arrives, driving conditions improve and daily gasoline consumption rises. The industry normally begins accumulating supplies of gas for the upcoming summer vacation and driving season this time of year. That combined with more urgent demand drives gasoline prices higher into summer. Not only that demand for gas but also the need to replenish depleted supplies of heating oil after heavy winter usage generates demand for crude oil. All these factors coinciding should shoot price for energies much higher. Looking at the seasonal data chart below you can see we are just at the beginning of the summer price rally for energies.
I expect to see prices get as high as they were in 2019 with RBOB hitting 2.15, crude oil hitting 75, and heating oil getting to 2.15. We will be trading the July contracts, looking to enter crude oil at 65.35, heating oil at 1.92, and RBOB at 1.99. That would be a $9,650 profit in crude oil, $8,400 profit in RBOB, and $9,660 in heating oil. We will place stops below the most recent swing in each sector, 58.4 in crude oil, 1.77 in heating oil, and 1.856 in RBOB. You can also trade the mini crude oil contract though July volume is incredibly low so you will likely need to trade the April and roll the contract near expiration. Margins for crude are $4,978, gasoline $4,950, heating oil $4,400, and for the mini crude at $2,489.
Coffee has started to look similar to the sugar chart on May sugar we shorted yesterday. We received a swing high last Friday, for similar reasons I was skeptical about this short trade, the price continued up despite this time of year typically not being good for coffee prices. As we are seeing in many commodity markets, rising bond yields are influencing overvalued commodities and bring price back down. Today coffee broke below the 10 DMA and opened with a gap down.
Moore's has a coffee short that it recommended on February 22nd that has been profitable 13 of the last 15 years. This is because Brazil, the world's largest coffee producer, begins harvest in May/June. Prices normally decline through April and into late May in anticipation of new supply hitting the market.
Coffee sentiment is at extremes which correlates well with price corrections as you can see from the 10 year coffee chart below.
We will look to enter coffee at it's current trade price at 134.5. Price should revert to the trendline near the .618 retracement at 127.5. This drop in price would be worth $2,625. We will place stops above the Friday close at 138 risking $$1,317. Coffee margins are currently $4455 on RJObrien. We will be trading the May contract.
Recommended entry or exit prices may not necessarily be reflected on the track record. Markets can change quickly resulting in stops being moved or profit levels changed based on new information. Brokerage customers are the recipients of these potential price adjustments made after initial recommendations.