Long-term Possibilities in Livestock and Grains

Posted on 03/09/2017 10:25 AM

Wheat: For the short-term trader, wheat futures are due for a few days of short-covering into a Level 3 cycle high. This may be a minor change in price as traders prepare for next week's USDA reports. Resistance for the July SRW contract is the five-day moving average near $4.77, a trendline of September/December lows near $4.79, followed by daily highs up to around $4.90. Support is every five cents lower from $4.70. For the intermediate trader, prices should bounce briefly then erode into a Level 1 cycle low due the last week of this month to first week of next month. For the long-term trader the coming low should trigger three-year and nine-year business cycle bottoms. The last three-year cycle low occurred in early 2014, while the prior nine-year cycle bottom was posted in 2005. 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: July corn futures are due for a brief round of short-covering ahead of next week's reports. Nearby resistance is the five-day moving average near $3.66 3/4, followed by daily highs up to around $3.75. A trendline from August and November lows offers $3.71 for additional resistance. For the intermediate trader, corn is likely to fluctuate with a lower bias to near end of the month to first week February for placement of a Level 1 cycle low. This type of bottom occurs two to three times per year and end users should not ignore it. The low $3.60s to upper $3.40s should be major support. Corn likely placed three-year and nine-year business cycle lows in late 2014 as did some foreign markets. And so corn is building a base from that low. An alternate forecast is similar to that of wheat and suggests said lows will occur with the coming Level 1 cycle bottom. 2016 is likely to be a bull market year that may extend into 2017. This is dependent upon a weather problem. And there are studies suggesting rising odds for such an occurrence. 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: Attention Tech Talk followers: A revision is made so that the bottom due near end of month to early next is likely to be more important Level 1 cycle type than Level 2 shown with Monday's update. This suggests a violation of the low made in November may be a bear trap or of limited downside potential. And it increases odds for a worthy rebound in February. But both model scripts offer price erosion this month. Support for the July futures is around $8.59, $8.56, $8.53 and $8.51, which include the December low and Critical Point objectives calculated from Monday's low and Tuesday's high. The market is oversold enough to consider pre-report short-covering. In the news: U.S. grain shippers await El Nino dryness after unseasonal flooding, Brazil to export record 57 million tons. PPW: 10/21: long one unit March futures at $9.05 1/2. 12/31: sell stop on position at $8.66.

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Soymeal: As with soybeans, consider meal will remain soft priced into a major low due in a few weeks. However, that low may lead to an uptrend into summer. PPW: 11/24: exited December positions at $285.30, bought July at $290.40. Although supplies might suggest there is little reason to be protected for 2016, I still believe meal is at a value and would favor at least 50% forward bought into summer. 12/16: 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.


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Cotton: A revision was made from what was shown in this week's Tech Talk update. Cotton is declining into a Level 2 cycle low rather than a Level 1, which reduces downside potential. The three-year cycle still offers upside potential for 2016. A Level 3 cycle low is due and the five-day stochastic is deeply oversold. Watch for signs of support near the 100-day moving average for the July contract around 63.72 cents. A sudden round of short-covering ahead of next week's reports is likely. In the news: cotton producers to boost 2016 plantings from 32-year low. 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. Consumers should continue to build a forward position.

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Cattle: Three-year cycle lows occurred in 2009, 2011, 2013 and as of December 2015. This type of business cycle spans three-to-four years bottom to bottom, top to top. The last top for cattle futures was in 2014, while beef prices peaked in 2015. This suggests a bull market for 2016 that may last into 2017, but the record high was likely also a nine-year cycle top, which suggests the coming bull market will cause a major retracement, but not a record high. 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: Nine-year and three-year cycle lows were placed in 2009. Three-year cycle bottoms occurred in 2011, 2013 and the next event is due late this month to early next. I believe the lowest price has already been seen, so a pullback will likely be a retracement for a truncated low. But this is the earliest for a long-term bottom. The low does not have to occur until late 2016 and for the latest allowed. Upside potential may be limited due to production. The analysis is mostly suggesting low valuation relative to demand potential. A rally into the summer grilling season is likely, but the size of the spread between summer contracts and spot prices may also limit upside potential. Nevertheless, watch for signs of a major low in pork cutout values and cash hogs now into next month. 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: 1/4: The standard continuation chart plunged last week, while the second contract version turned up last week. The five-week stochastic for the second contract continuation chart made a buy signal. The September C3 futures also achieved a buy signal for the five-week stochastic, while cheese made a year-end rebound. Although of risk of being early still, this month's low may have been a long-term three-year business cycle low. At least a Level 2 cycle low should be in place, suggesting a recovery this month. In the news: Texas/Mexico blizzard kills 30,000 dairy cows. 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: Concerns of U.S. PMI and China growth weighed on stocks yesterday. 1/4: Sharply lower start for 2016 according to overnight index futures trade. And this despite improving PMIs around the world. U.S. December PMI is due.

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Economy: 1/4: Singapore's economy rose 5.7% for the fourth-quarter compared to the previous quarter. A Bloomberg survey had estimated 1% growth. Singapore is a major commodity trading hub. New manufacturing orders in Japan for December, matched the pace of October, which was a one-year high. The headline Nikkei PMI was unchanged from November. Official PMI for China for December came in at 49.7, which was in line with a poll by Reuters of expectations of economists. This was a minor uptick from the November pulse of that nation's manufacturing. South Korea's December PMI rose to above 50 (signals growth) for the first time in 10 months. Taiwan employment speeds to five-month high. New orders and manufacturing output increase for the first time in nine months. The euro-zone made solid progress in terms of manufacturing from increases in new orders, new export business and growth in production. Leaders were Italy at a 57-month high, France at 21-month high and Germany at a 4-month high. Greece posted a 19-month high for PMI within the euro-zone rating. Brazil's contraction continued, but at a slower pace. Evidence of a turn higher for the global economy was on the rise in December. Business cycles still call for growth in 2016. 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: 12/21: Stalling with realization the Fed will take its time on raising rates in 2016.

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Dollar: 1/5: The euro failed yesterday for a possible Level 3 cycle low that is still due, but with an intermediate cyclical low due early next month, the rolling over pattern is likely a sign of a corrective market.

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Energy: Oil: 1/4: Higher prices were seen overnight on Middle East tension, but eroded by morning. Level 1 and three-year cycle lows are due this month. 12/28: The spot chart violated a downtrend since the November high, but barely so. And the five-day stochastic is overbought with a Level 3 intra-month cycle low is due late this week to early next. Given bulls have found it difficult with no significant change in spot based fundamentals, I will go with the market retraces. But 2016 still has moderate bullish potential. Ethanol: 12/28: Leaning toward violation of a downtrend since early December. The five-day stochastic was long last week. Natural Gas: 12/28: Sizable recovery seen last week for the spot chart. The five-day stochastic is overbought. Resistance is around $2.256. PPW: 10/28: long July heating oil at $1.5433-risking 10 cents at first (stopped 12/2, long July crude oil (WTI) at $47.94-risking to $40.00 at first, stopped out 12/21. Spring/summer hedge. 12/7: will repurchase July heating at $1.4955 stop.

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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: 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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