The Tools WE Use
Marketing........what is it? Is it an art, or is it a science. I often laugh when I see the experts pulling out their charts, graphs, worksheets, or what have they to make their bold market forecasts. You have seen this before. These people get paid big money because they make people believe they know something nobody else knows, and that they can give you an edge. There is a general consensus between these people about market direction, and when they are wrong, well nobody saw it coming.
I will tell you right now that they do not have a crystal ball and neither do I. I am just trying to locate actionable places to make marketing decisions and notifying you when certain objectives are met.
I will tell you right now that they do not have a crystal ball and neither do I. I am just trying to locate actionable places to make marketing decisions and notifying you when certain objectives are met.
1. Actionable Places Using Basic Charting
In the Wheat Chart below, I have identified key technical places where a long or short recommendation could be made. This is what I look at. keep in mind that I would not have been making recommendations on a chart two years before the contract expires. This chart does show actionable areas that are useful to point out. Some are more useful than others.
1. Useful. While the contract had not yet traded enough to begin a too day moving average, obviously prices were very stretched at a point in time when the Commodity Channel Index was giving a sell signal. Taking off risk would be advisable.
2. Useful. After a steep sell off, market sentiment had reset, and the CCI was giving a buy signal. Time to lift hedges and sell puts.
3. Mixed. This time when the market peaked, there was no indication by the CCI. Market cycle studies however would have alerted you that the market was due to move into a cycle low at any point. Taking risk off here would have been prudent.
4. Mixed. Price fell below the 200 day moving average, which had just begun showing. Time to take a more bearish market posture....selling into strength.
5. Useful. As expected, a buy signal was given while we were expecting the wheat cycle to reach its cycle low. Lifting hedges and selling puts would be justified.
6. Mixed. As prices moved into the 200 day moving average, it made sense to take a neutral posture at the least. No signals given on the CCI, but you might expect prices to move lower due to its cycle.
7. Useful. A buy signal on the CCI following a steep decline is a safer time to lift hedges. This signal would ultimately not work out.
8. Useful. Again, another buy signal from the CCI. This would prove to have been the lowest wheat traded since inception of the contract in July of 2010.
9. Useful. In a bearish market, the price traded more sideways, yet a long signal was still near the bottom of the range.
10. Mixed. Prices were popping for the first time in a long time, and the 200 sma had worked itself back down near where prices were. The 200 sma was still pointed downward however, and typically it takes a lot of time and price movement to turn it back higher. That is just what we had.
11. Useful. A sell signal from the CCI in late June. The 200 SMA had turned up very quickly, so our marketing stance would have become bullish. This would have been a great time to have made a sale.
12 and 13. Useful. A great time to take off risk each time.
14. Useful. A rather consistent trend line had developed while prices consolidated. Once the trade had allowed this line to be broken, you would have to expect lower prices.
15. Mixed. The 200 day moving average usually is an actionable place as it tends to repel prices. Not true in this case however. Had the CCI given a buy signal, there you would probably want to take it.
16. Useful. The CCI is saying buy as the price met horizontal support. Because the price did fall below the 200 sma, you would need to keep in mind now that rally's are made for selling now, and will probably be short lived. I would probably expect prices here to rally back to the 200 day sma at $8.00, but probably not a lot further above that.
2. Useful. After a steep sell off, market sentiment had reset, and the CCI was giving a buy signal. Time to lift hedges and sell puts.
3. Mixed. This time when the market peaked, there was no indication by the CCI. Market cycle studies however would have alerted you that the market was due to move into a cycle low at any point. Taking risk off here would have been prudent.
4. Mixed. Price fell below the 200 day moving average, which had just begun showing. Time to take a more bearish market posture....selling into strength.
5. Useful. As expected, a buy signal was given while we were expecting the wheat cycle to reach its cycle low. Lifting hedges and selling puts would be justified.
6. Mixed. As prices moved into the 200 day moving average, it made sense to take a neutral posture at the least. No signals given on the CCI, but you might expect prices to move lower due to its cycle.
7. Useful. A buy signal on the CCI following a steep decline is a safer time to lift hedges. This signal would ultimately not work out.
8. Useful. Again, another buy signal from the CCI. This would prove to have been the lowest wheat traded since inception of the contract in July of 2010.
9. Useful. In a bearish market, the price traded more sideways, yet a long signal was still near the bottom of the range.
10. Mixed. Prices were popping for the first time in a long time, and the 200 sma had worked itself back down near where prices were. The 200 sma was still pointed downward however, and typically it takes a lot of time and price movement to turn it back higher. That is just what we had.
11. Useful. A sell signal from the CCI in late June. The 200 SMA had turned up very quickly, so our marketing stance would have become bullish. This would have been a great time to have made a sale.
12 and 13. Useful. A great time to take off risk each time.
14. Useful. A rather consistent trend line had developed while prices consolidated. Once the trade had allowed this line to be broken, you would have to expect lower prices.
15. Mixed. The 200 day moving average usually is an actionable place as it tends to repel prices. Not true in this case however. Had the CCI given a buy signal, there you would probably want to take it.
16. Useful. The CCI is saying buy as the price met horizontal support. Because the price did fall below the 200 sma, you would need to keep in mind now that rally's are made for selling now, and will probably be short lived. I would probably expect prices here to rally back to the 200 day sma at $8.00, but probably not a lot further above that.
2. Correlations With Other Asset Classes
What is the most widely traded asset class? Would it be stocks, or commodities? No, it is the currency markets by a very wide margin. Forex markets trade 24 hours a day, 7 days a week around the world. The strength or weakness of the dollar has a tremendous bearing on the direction of stocks and commodities to a greater or lesser extent. Tracking this relationship will give me more confidence picking market direction.
3. Cycles
Cycle Analysis should be an important part of in any kind of trading you do. Any market traded moves in waves. Different markets have rhythms to them. Knowing when to expect the market cycle to bottom could tell you that it might be prudent to sell some grain or buy some puts. Cycle analysis is a great tool for locating bottoms of markets, but not so much tops. As such, they are also useful for finding actionable places to sell puts.
I closely watch cycles on the dollar and corn. In those two asset classes, I am mostly concerned with daily, intermediate, and yearly cycles. For farmers, the intermediate cycles are probably most useful, and will be the ones I watch most closely.
I closely watch cycles on the dollar and corn. In those two asset classes, I am mostly concerned with daily, intermediate, and yearly cycles. For farmers, the intermediate cycles are probably most useful, and will be the ones I watch most closely.
4. Point And Figure Charts
P&F Charts are a great tool to find some clarity when every other tool fails to provide it.
So How Do I Decide How To Sell?
Once it is determined when to sell grain, it must be determined which vehicle best suits your situation to actually market your grain. Given the cash price you receive is determined by the futures and the basis, it really works to your advantage to lock in both at different times. The matrix below is a tool that I use to help determine how grain should be sold. Read below for further explanation of the strategy.
Straight Hedge With Futures or Futures Only
1) Usually profitable price level or price target hit
2) You're prepared to leave it on no matter what
3) You believe the down move is either imminent or already underway
4) You can modify this strategy to be more defensive if the market appears toppy to sell shy of the target
5) Requires margin money to hold onto positions, with the possibility of future margin calls
Hedge To Arrive
1) Meets conditions of a straight hedge, but you are not in a position to meet margin calls
2) There is little or no risk of unusual basis distortions
3) You thoroughly understand contract provisions
4) Issuing elevator is solid and reputable
Purchase A Put
1) Good substitute for an offensive hedge if unsure of topping action or you're not prepared to meet unlimited margin calls
2) Good substitute for a defensive hedge if unsure of topping action and willing to salvage premium if sell signal is negated
Cash Sale
1) Sale is "offensive" in nature, meaning you reached your sales target or objective
2) You have a known quantity and can move it at once
3) Normal basis gain is not likely to pay for continued storage
4) You are willing to re-own in futures or options if conditions change dramatically
Cash Forward Contract
1) Sale is "offensive" in nature, meaning you reached your sales target or objective
2) You are not yet prepared to deliver, or forward delivery months offer reasonable return to storage in the form of premium
3) You are willing to re-own in futures or options if conditions change dramatically
Minimum Price Contract
1) Sale is "defensive" in nature, meaning the price outlook is not so good and you fear your target or objective will not be met
2) You still see a chance for a turnaround later, but buying back in futures or options is not an alternative
3) Premium being charged is not much more than cost of selling cash and buying a call option instead
Writing Covered Calls
1) You're willing to risk being short if prices rally to strike price
2) You would consider keeping short position as a hedge
Minimum Price Contract
1) Additional basis gain unlikely to cover further storage
2) Sale is "offensive" in nature (locks in reasonable price) and eliminates risk of bullish bias being WRONG!
3) Premium being charged is not much more than the cost of selling and buying a call option instead
Basis Contract
1) Additional basis gain unlikely to cover further storage
2) Contract basis very close to spot basis
3) Opportunity to roll into later delivery month by paying any carrying charge at the time
Sell Cash And Buy Futures
1) Additional basis gain unlikely to cover further storage
2) Offers more attractive basis than a basis contract
3) You will limit losses in futures to savings in storage cost
4) You are confident of both direction and timing of bull move
Sell Cash And Buy Calls
1) Additional basis gain unlikely to cover further storage
2) Offers more attractive basis than a basis contract
3) You aren't prepared for open-ended margin call risk
4) You aren't confident of timing of a bull move
Deferred Price Contract
1) Storage is either unavailable or too expensive relative to expected improvement in basis
2) Elevator is bonded and rock solid, since you are an unsecured creditor in the event of merchant bankruptcy
Doing Nothing
1) You have reasonably priced storage available
2) Normal basis improvement will more than cover storage cost
Courage Calls
1) Buying a call at a high strike price will give you the courage to sell into a rally towards that strike price
2) Use normal basis considerations to decide how to sell into rally towards strike price you have purchased
1) Usually profitable price level or price target hit
2) You're prepared to leave it on no matter what
3) You believe the down move is either imminent or already underway
4) You can modify this strategy to be more defensive if the market appears toppy to sell shy of the target
5) Requires margin money to hold onto positions, with the possibility of future margin calls
Hedge To Arrive
1) Meets conditions of a straight hedge, but you are not in a position to meet margin calls
2) There is little or no risk of unusual basis distortions
3) You thoroughly understand contract provisions
4) Issuing elevator is solid and reputable
Purchase A Put
1) Good substitute for an offensive hedge if unsure of topping action or you're not prepared to meet unlimited margin calls
2) Good substitute for a defensive hedge if unsure of topping action and willing to salvage premium if sell signal is negated
Cash Sale
1) Sale is "offensive" in nature, meaning you reached your sales target or objective
2) You have a known quantity and can move it at once
3) Normal basis gain is not likely to pay for continued storage
4) You are willing to re-own in futures or options if conditions change dramatically
Cash Forward Contract
1) Sale is "offensive" in nature, meaning you reached your sales target or objective
2) You are not yet prepared to deliver, or forward delivery months offer reasonable return to storage in the form of premium
3) You are willing to re-own in futures or options if conditions change dramatically
Minimum Price Contract
1) Sale is "defensive" in nature, meaning the price outlook is not so good and you fear your target or objective will not be met
2) You still see a chance for a turnaround later, but buying back in futures or options is not an alternative
3) Premium being charged is not much more than cost of selling cash and buying a call option instead
Writing Covered Calls
1) You're willing to risk being short if prices rally to strike price
2) You would consider keeping short position as a hedge
Minimum Price Contract
1) Additional basis gain unlikely to cover further storage
2) Sale is "offensive" in nature (locks in reasonable price) and eliminates risk of bullish bias being WRONG!
3) Premium being charged is not much more than the cost of selling and buying a call option instead
Basis Contract
1) Additional basis gain unlikely to cover further storage
2) Contract basis very close to spot basis
3) Opportunity to roll into later delivery month by paying any carrying charge at the time
Sell Cash And Buy Futures
1) Additional basis gain unlikely to cover further storage
2) Offers more attractive basis than a basis contract
3) You will limit losses in futures to savings in storage cost
4) You are confident of both direction and timing of bull move
Sell Cash And Buy Calls
1) Additional basis gain unlikely to cover further storage
2) Offers more attractive basis than a basis contract
3) You aren't prepared for open-ended margin call risk
4) You aren't confident of timing of a bull move
Deferred Price Contract
1) Storage is either unavailable or too expensive relative to expected improvement in basis
2) Elevator is bonded and rock solid, since you are an unsecured creditor in the event of merchant bankruptcy
Doing Nothing
1) You have reasonably priced storage available
2) Normal basis improvement will more than cover storage cost
Courage Calls
1) Buying a call at a high strike price will give you the courage to sell into a rally towards that strike price
2) Use normal basis considerations to decide how to sell into rally towards strike price you have purchased
