Hog Futures Build Swing Potential

Posted on 03/09/2017 10:25 AM

Wheat: For most of the month SRW prices traded sideways into a triangular formation. This suggests an equilibrium of supply and demand via futures. The market is comfortable at this price level. The five-day stochastic is quiet and neither overbought nor oversold. And so, prices can swing in either direction. The business cycle model favors an upswing as minimum to ideal requirements were met for a Level 3 intra-month cycle low, but such a bottom may delay until early next week. The coming round of rising buyer interest will be a component of a larger intermediate uptrend for next month and relates to how business procures wheat during a quarter. In the news: Russian grain export record-high in December on weak rouble. (Shows firm global demand in my opinion. But economic growth required). Posson's Profit Watch (PPW): 11/24: rolled to March SRW if not stopped out in October. Otherwise: bought March futures 11/24: at $4.94. May trade in and out along the way.

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Corn: Overnight prices made a new high for the week and extended the up trend since Jan. 7. The July contract punched through resistance at the 40-day moving average, but it is questionable as to sustainability given that the five-day stochastic is overbought. And a Level 3 intra-month cycle low is due tomorrow to mid-next week, which offers at least a minor dip for a shallow correction. And a barely noticeable setback is feasible in that prices have marched high enough to confirm a Level 1 intra-year business cycle bottom was placed Jan. 7. The related trend is up through February with potential for $4.00s to $4.10s. The five-week stochastic made a buy signal last week and prices violated a downtrend since last summer's high. I am finding an increasing number of commodities are due for an upswing in February. This may be a sign funds are returning commodities to the long-side of portfolios. In the news: corn climbs to one-month high as supply outlook tightens, U.S. corn acres to rise, soy to fall in 2016-Farm Futures -"neither corn nor soybeans is showing a profit based on current 2016 crop prices". PPW: 11/24: rolled to March -if not stopped out in October. Otherwise:11/24: bought March at $3.70. 12/28: Since this column is updated only in the morning, a backup strategy for this column will be an exit of reownership of an official Pro Farmer position intra-day. 11/24: Feed users should be at least 50% covered into summer.

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Soybeans: Futures are working lower as expected into a Level 3 intra-month cycle low. If the last low was on Jan. 6, then the bottom can occur as soon as today. An alternate forecast calls a more important Level 1 low as of Jan. 12, which would greatly reduce downside potential and would not allow for a Level 3 cycle low until next week. Both model scripts call for a price appreciation next month, but a major low is to be placed from Jan. 12 to month-end and perhaps near the start of next month. Combining both scripts shows trade above Monday's high at $8.88 for the July contract would signal the larger trend is up. The oversold five-week stochastic made a buy signal last week. PPW: 10/21: long one unit March futures at $9.05 1/2. 12/31: sell stop on position at $8.66. Stopped out.

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Soymeal: As with soybeans, meal is drifting lower into a Level 3 bottom if not a very late Level 1. The forecast offers higher prices next month. The five-day stochastic is nearly oversold suggesting downside potential ought to be limited the next few days. A close above Monday's high at $278.70 for the July contract would be supportive of the opinion, but a new high of the month is required as evidence. PPW: 11/24: bought July at $290.40. 1/13: Calling Level 1 cycle low in place as of Jan. 4. If building a position consider a pullback as a buy opportunity. Risk below the recent low if a stop is desired.


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Cotton: Due for an intermediate cycle bottom this month and the five-week stochastic is oversold with narrowing spread. A buy signal would likely mean the cycle's trend has turned up and demand via futures has returned. Closes above this week's high at 63.47 cents for the July contract would also be evidence. PPW: 12/18: Long July futures for a buyback on a stop at 65.00 cents. One can then risk to below a recent low.

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Cattle: The trend is down as expected into a Level 2 cycle low due early next month, but prices are allowed to now trade sideways into said bottom. See Tech Talk for a chart update of technical factors and model forecast. PPW: 12/28: With use of the continuation chart, I must call a three-year business cycle low in place for futures, but there is not evidence in beef prices at this time.

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Hogs: An intermediate cycle trend low is due staring today, but does not have to occur until early next month, albeit this month is favored. If correct then the sideways trade since last December in the June contract is not the normal performance into a Level 1 cycle low relative to the November bottom. This means a revision is in order to show the Level 1 (most important intra-year fluctuation) bottomed in November and hogs are bottoming or will soon place a Level 2 low (second most important intra-year trend). And this suggests funds are not finished accumulating futures for a run higher into the summer grilling season. Producers/commercials who have sold well enough to stall the uptrend in recent weeks may back off for a while, which would mean the range trade has created additional upside potential. Major support is the 40-day moving average near $76.00 for the June contract. Resistance is this year's high at $78.95. Assume some form of trend has turned down until a breach of that level. And when such a breach occurs, consider a return to around $81.00. Use point and figure charts of the recent tight range to create upside objectives. The tight range increases odds of such calculations to be of higher probability than otherwise. A Level 1 low in November would also increase odds a three-year business cycle bottom was placed then. This could keep hog prices off that low throughout 2016. PPW: 10/8: Risk of a correction has returned. Use of put options would provide a floor price to guard against lower than expected futures into November. 12/1: Time for a retracement higher.

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Milk: 1/21: For the September C3 futures the Level 1 cycle trend may still be down, but still due to make a low. A weekly close above last week's high at $16.05 would be a sign the low is in place. That high was likely a Level 2 cycle top. A near-term breach would be a setup for a sustainable uptrend into March. PPW: 8/3: If concerned of supplies distorting cyclical behavior, then use put options to insure production value. One could sell calls as well and in order to create a range of price. A strategy known as collar.

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Stock market: 1/21: A Level 1 and three-year business cycle low may have occurred as of yesterday. Amazing to see the DJIA down more than 500 points, followed by nearly a full recovery the same day. High frequency trading is a drama queen. Makes for historical nonsense. Bogle of Vanguard funds told the average investor to do nothing. Keep investing. Market is too fast to move in and out for the average investor. There may be more downside into start of next month, and Asian markets look weak, but if the low was not placed yesterday for the U.S., then any day now. A sharp decline followed by a large snap back in the same session, may be a sign the market needs to drift lower to test that low in a more orderly fashion. But overnight trade did not seem interested in weak Asian markets.

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Economy: 1/21: U.S. Consumer Price Index down 0.1% in December when investors expected a flat performance. November net foreign purchase of T-bond and notes was $38.4 billion versus a minus $55.2 billion in October. For November, total net long-term capital inflows for the U.S. were $31.4 billion compared to the prior month at minus $17.7 billion. September to June of 2015 were net inflow months. 1/19: China home prices improved in more cities in December. China takes the high road for not allowing oil prices to decline for its consumers as fast as the free market. Assists with securing domestic supplies and fighting pollution. But it may line the pockets of oil companies. U.S. retail sales with a minor slip in December. But a strong gain for restaurants and home furnishings. University of Michigan Consumer Sentiment January Flash was up slightly, while the expectations component rose 3 points. Overall trend has been strong since October. PPW: 11/3: I have called a three-year business cycle bottom for the global economy in terms of the JP Morgan Global PMI. Economies should grow into 2017. Watch for signs of an end to the commodities bear market since 2011.

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Interest Rates: 1/19: Volatility jumped last week and in favor of bears for the 10-year note. Rates has been range bound since August. Extremely slow uptrend in three-year cycle since start of 2015. The rate briefly dipped below 2% last week. Support is likely 2.0% to 1.9%.

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Dollar: 1/20: Dollar touched one-year low against the yen. 1/19: Index struggles higher into a Level 2 cycle high due early February. If over 100.51 from now until the peak, then support may be seen into April for a more important Level 1 top and yet another opportunity for a three-year cycle high. Otherwise, the December peak was a Level 1 and for now, it is assumed to be a three-year cycle high. Trade below 98.049 on a weekly close would be bearish. Chinese offshore yuan was stronger against the dollar past two weeks.

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Energy: Oil: 1/21: A broken market. Long-term to intermediate objective methods have been exhausted. So bounces of a day or two or three can be used to create objectives a few cents lower, but other than than there is no major downside objective. I moved the Level 2 cycle low of late October to the latest allowed in November, which revised the coming Level 1 low to be due this week and the next four weeks. Odds favor no later than the next three weeks. Just as traders kept oil near $100.00 during 2011-14 as they refused to acknowledge rising supplies over demand, they may keep prices low far too long. Nevertheless and recovery to the $50.00 area this year is feasible. A weekly close above $30.21 may be evidence the Level 1 trend has turned up. So would be a buy signal from the five-week stochastic. The model allows for a rebound next month. I find it interesting that several commodities are due for a recovery next month. This may be a sign commodities are to return to long side portfolios of funds. Natural Gas: 1/19: Trending lower into Level 2 cycle low due early next month. PPW: 1/8: buying July oil and risking to $36.30- stopped 1/11. Buying July heating oil and risking to 1.1230 -stopped 1/11.

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Climate: 12/21: Since 1896, years ending in six were of higher prices by end of June compared to the close of the prior year for 92% of the time. Some of the up years were with higher yield and production, but the better of upside performance related to lower yield. Five-to-seven year climate and corn yield cycles offer a crop problem some time 2016-18. El Nino is the strongest in decades. Such events in 1972-73 and 1982-83 occurred ahead of adverse crop events. We should watch for signs of a return of La Nina starting in 2016, which could cause problems for U.S. production.

Education: 1/19: Welles Wilder created the RSI, which was published in New Concepts in Technical Trading Systems in 1978. A common setting is 14-days and the indicator uses a scale of momentum from 0 to 100. Most traders assume overbought begins at 70 and oversold starts at 30. But more experienced traders use favorite or optimized settings. Extreme readings suggest stronger momentum of price. The indicator uses a ratio of higher closes to lower closes. Wilder posited that divergence of RSI to price was an important characteristic and that adding trendlines to the indicator may at times be more important that finding trendline support and resistance on the price chart itself. Traders using the indicator for signal normally favor a more into the overbought or oversold zone and when the indicator leaves that region the trend has likely reversed. Reference: John J. Murphy (2009), The Visual Investor: How to Spot Market Trends (2nd ed.) John Wiley and Sons.

12/29: Stochastic indicator: During the 1940s and 1950s, George Lane was part of a group of researchers and educators of stock and commodity traders. He was instrumental in development of what is a well used indicator known as stochastic. In his own words, "As a result of all the hard work (the 14-hour, mostly by hand, no-pay days), we decided that the most reliable indicator was %D for '% of Deviation.' The basic premise of %D is that momentum leads price." I do not care for the fast version and so my analytical discussion will speak of the slow stochastic as -stochastic. The stochastic uses averages to smooth data and performance for a better looking fit to price trends. This form of indicator requires three input settings; %K periods, %K Averaging Periods and %D. Some charting programs will also allow for selecting the type of average for what is called "%D Method." I favor this indicator over others in that it often turns closer to bottoms and tops than other varieties or techniques. The indicator is range bound and when it is in the lower portion of the range the market is said to be oversold. If in the upper portion of the range, that market is assumed to be overbought. Oversold and overbought conditions suggest the trend of the market is reaching an extreme according to the time followed (settings), which in turn is an alert to watch for signs of a reversal otherwise known as a low (bottom) or high (top). Since the indicator shows two lines (%K and %D), some traders will use the crossing of the lines as a buy or sell signal. I find this indicator is useful in relation to cyclical patterns -trends. It can be applied to a variety of time frames such as daily, weekly and intra-day prices. At the Pro Farmer website, you can create a chart and add this indicator. Change settings for a best fit characteristic to meet your hedging/trading requirements. The concept behind the indicator is that "As prices move down, the close of the day has a tendency to crowd the lower portion of the daily range. Just before you get to the absolute price low, the market does not have as much push as it did. The closes no longer crowd the bottom of the daily range. Therefore, Stochastics turns up at or before the final price low." (Getting Started With Stochastics, by George C. Lane & Caire Lane, 1998, pg 2.) My stance on all indicators is that they are just an indication and should be used along side something that is of another perspective. An example would be, the fundamentals are bearish, so be cautious of buy signals and pay strict attention to sell signals. I find a weekly version of the stochastics makes for a fine backup, if I have been probing for a cyclical high, but the market starts down without me.

Twitter: rich_posson

 

 

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