Lower China Stocks Capped Enthusiasm in Commodities

Posted on 03/09/2017 10:24 AM

Wheat: Open interest for all three wheats has risen since December suggesting a return of business as traders prepare for 2016. Prices are somewhat above the December low suggesting there has been more buyer interest than from sellers, but only modestly so. July SRW shows a bit more strength than the other wheat flavors and it has recently seen some profit taking into what was likely a Level 3 cycle low made yesterday. Nearby resistance is the 100-day moving average near $5.02. It may be a grind, but the larger intermediate trends should be up for February. European prices act as though an important reversal higher is underway. And yesterday, there was news of some crop damage in eastern Europe and the Ukraine, but with some of that region with snowcover, traders await on news of the degree of impact. 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 futures quietly trade along the 40-day moving average near $3.78 as the market builds a bullish flag into a Level 3 cycle low. Level 3 cycle trends are when buyers buy for a few days to a couple of weeks and back away for about the same amount of time. This suggests a pattern of monthly-based procurement. Larger intermediate trends are up through February and reflect quarterly to semiannual demand via futures. During late October to early November as the bins were nearly full, farmers made deliveries and traders followed. In early January, I realized farmers may have made more aggressive sales than I realized during late December. Yesterday, on Market Rally a guest said a merchant firm had noticed more brisk sales than normal for December. This may have put farmers in a better position to hold out for better prices early this year. And I find that the higher farmer and fund sales during December did not cause damage to the long-term sideways trade seen on the continuation chart. This suggests stronger than realized demand during late December. The range suggests a value level to buyers. And I believe it means farmers feed the market, but the demand side has not fulfilled its needs. Although it may be a grind higher, I will stay with the forecast for cyclical and seasonal price appreciation through February. Long-term analysis also offers bullish possibilities this year. And at the Davos summit some big players recognized current headwinds, but offered some positives for markets and the economy. Goldman Sachs favored reinflation this year and chance for 11% increase in the stock market relative to the S&P 500. Last night there was news of a forecast for China to import more oil and other energies, which does not support concerns over the Chinese economy relative to commodities. Bullish minded funds likely prefer agriculture over metals, followed by oil. The ratio of corn to crude oil suggests that if it were to rally to 1990s levels and oil stayed at $30.00, corn would be over $7.00. The study is not suggesting such an occurrence, it is suggesting there is room for non-energy markets to disconnect from oil. The ratio has turned up suggesting corn is more interested in the microeconomics than outside markets. We may learn a turn higher in commodities preceded news of improving economies. Some of the metals are showing signs of forging a low. Tech Talk was updated yesterday. 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: July futures are building a bullish flag. Closes below $8.77 may be a sign the flag is breaking down, but closes above $8.91 3/4 would be a sign the flag is complete. Next resistance would then be daily highs up to the 200-day moving average near $9.22. A point and figure chart of the possible flag offers $9.02 to $9.07 and is building additional potential. If not in place a Level 3 intra-month cycle low is due. PPW: Range trade with potential for a swing higher next month. China New year Feb. 8.

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Soymeal: July futures may still be trending down into a Level 3 cycle low, but the market is oversold and it has been a grind for bears. 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: Well within the time and price objective for a Level 1 cycle low as shown at yesterday's update of Tech Talk. The five-week stochastic is oversold and sensitive to rising prices. A buy signal would likely be a sign of said low. The forecast is for a Level 2 cycle rally next month. 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: 1/25: June cattle traded a positive reversal week from the second Level 3 cycle low since the December bottom. A related peak is due and the larger intermediate trends favor sideways to lower into a Level 2 cycle low due next month. This suggests cattle rallied within a larger correction against what may be a long-term low placed in December. Beef prices normally rally late December into January and decline into a low in February. Resistance is near the January high at $128.57 1/2 for the June contract. Support is $118.77 1/2 to $116.00. 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: Looking strong and at a steady pace. 1/25: The June contract continues to grind higher from a major low made in November. A significant top now would be unusual at it is too late for a Level 2 cycle high and too soon for the more important Level 1 cyclical trend to peak. Major resistance is around $81.00 and cycles plus momentum studies suggest bulls can provide support into late February or March. Prices ground through 100- and 200-day moving averages. . And last week's bounce violated a range since late December, which is where producers/commercials sold, but the appetite by fund's was likely not met. National pork cutout values violated the December high and are now well above the five-week moving average that is turning higher. Cash hogs relative to the lean hog index sped higher last week for a three-week bounce. The index had been lagging cutout and futures. PPW: 1/25: The November low may have been a long-term three-year business cycle bottom.

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Stock market: 1/26: Japan's Nikkei index was sharply lower today and likely to swing down into at least a Level 3 intra-month cyclical low next week. Violation of the prior day's high would be a sign of strength and may signal a major bottom was forged. China's Shanghai Composite traded sharply lower and violated the August low to extend a bear market of the three-year cycle. The five-week stochastic is extremely oversold and of narrowing spread. A Level 1 cycle and possible three-year business cycle bottom are to occur next month. I favor early. Closes above last week's high could be significant. The S&P 500 is testing last week's wild positive reversal. Odds are on the rise for Level 1 and three-year business cycle low.

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Economy: 1/25: December existing homes were stronger than analysts expected. Sales were the best since September and remained above an important high seen in 2013. Some of my sources peg inventory at 3.9 months or the tightest since 1982. Markit's January PMI Flash showed improvement over January and still reflected a growing economy. Official January PMIs will be seen Feb. 1. 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: 1/25: Level 1 cycle lows for the 10-yr Tnote was placed in January and August. A related low is due now and might have recently been forged. Level 1 highs occurred in June and November. A swing higher from this cycle may support rates into April. The first chance for a three-year cycle high was during November to December, while the latest for a peak is November of 2016. Consider a range of 1.9% to 2.4% in coming months.

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Dollar: 1/25: The dollar index is working higher into a Level 2 cycle high due early next month. A respect of 100.51 could be a sign of range trade that eventually develops into a bear market of the three-year cycle. Violation of 100.51 may be a sign of support into April/May for final opportunity for placement of a three-year cycle high. The dollar was acting weak against the Canadian last week. The dollar is likely within a bear market against the yen and relative to the three-year cycle.

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Energy: Oil: 1/26: The five-day stochastic is overbought for the second contract continuous chart. So, even if a major low was recently placed, upside potential should be limited and another swing lower should not ruled out. But I like the response to the recent storm/cold. Suggests low prices.1/25: Level 1 cycle lows were placed in March and August. A related bottom is due. Volatility seems too high for a confident and accurate call of such a bottom. But odds favor a low was made last week and it does not have to occur until early next month the latest. Need trade to above $36.24 as a bit of evidence. Ethanol: 1/25: Level 1 cycle low as of week ended Jan. 15 for the continuation chart. That low is a risk point for the forecast. Subject to revision due to oil drama. 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: 1/25: Cosmic rays trend in a nine-year cycle similar to sunspots. That cycle bottomed in 2014 with second chance as of early 2015. 100% of the time a crop problem with a drop of 7% to 28% occurred within five years of the low. Most of the time a weather-related crop problem occurred within the first two years. The five-to-seven year cycle for climate is due to strike 2016-18 with a preference for hot and dry, but can be of combinations throughout spring and summer. Corn is very sensitive to temps. The Corn Belt has been sheltered by that cycle and a nine-year version that protected crops from global warming cyclical trends. But this protection can disappear in 2016-18. A similar cycle is due for low corn yield and production for the same period. Global weather remains volatile.

Education: 1/25: Moving averages: Averages come in many varieties such as simple, exponential or weighted. I favor simple. You need to select an average's setting that reflects the type of trading or hedging desired. A five-day moving average may provide signals one or more times per month, while the 40-day version may provide a few per year. I favor the five-, 40-, 100-, and 200-day moving averages. Media suggests most traders favor the 50-, 100 and 200-day, while there is some discussion of 9-, 10-, 20-day averages. The 40-day has increased in popularity in recent years. Averages can be applied to various time frames. In example: a 10-minute average or a 40-week. Averages may serve as a flexible trendline providing support and resistance levels to watch for signs of entry or exit of a hedge or trade. This study can be used to detect a trend reversal (an end to a price move). Some traders use two averages for a crossover bullish or bearish signal. A Death Cross is often when the 50-day turns below the 100-day. I do not care for crossover trading systems as it seems the signal is rather late compared to other technical analysis such as patterns. But like trendlines, averages can show price levels when supply and demand reverse. The more important insight from averages is how the market responds when trading to such a level. I believe the averages I follow reflect an economic level.

1/19: Relative Strength Index (RSI): 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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