Sharply Lower Chinese and U.S. Stock Markets Weigh on Commodities

Posted on 03/09/2017 10:25 AM

Wheat: Outside markets may weigh on grains today. Wheat is oversold and the five-day stochastic is set up for a buy signal even with a modest lower close. But the close has the final say on the indicator's performance. And the trend since mid-December is still down. 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: A buy signal was made in the oversold five-day stochastic, but barely so. With lower overnight trade confidence in the signal is not high. The downtrend since Dec. 7 is intact and it will take a return to $3.60 (for the July contract ) to say otherwise. The market is likely to remain depressed into next week's reports, but one should still allow for pre-report short-covering. Using a commodity index by the former Foundation for the Study of Cycles that spans from 1740 to 1995 and the Bloomberg Commodity Index to current, I find only 12% probability the bear market since 2008 or 2011 will last through 2016. Weather research is leaning toward a crop problem this year. Corn yield may range from 159 to 142 bu. per acre on a national basis. I also learned that during the first five years following a nine-year cycle low for cosmic rays (similar to the 11-year cycle for sunspots) that a crop problem occurred 100% of the time since 1950, which is when the data begins. And 80% of events occurred during the first two years from the low. The low is in place and 2016 is on the list for a crop problem. 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: The Chinese stock market weighs on global equity and commodity trade. The U.S. stock market was sharply lower in overnight trade. But the dollar has accomplished little. It should correct in the next few days. So long as 100.51 is not breached near-term there is chance the dollar index has peaked long-term, which would be the second opportunity since the March high, which was the first time allowed for such a reversal. The oversold five-day stochastic made a buy signal yesterday for the July soybean futures and lower overnight trade did not impact the indicator. But this depends upon how low of a close. Yesterday's price action was impressive as an outside day following an inside day, but what is intriguing is the outside day breached the low and high of Monday. Volume surged to a contract high suggesting some large players were taking action that day. Since the day finished as a positive reversal, buyers were the more aggressive. This may have been flash in the pan trade ahead of reports (short-covering), but at least a Level 3 cycle bounce seemed likely. I think we will learn of research pointing to a 43 bu. per acre yield or lower for 2016, but as always -subject to revision. 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: The oversold five-day stochastic made a buy signal yesterday for the July contract. 1/6: 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: The trend is down. Support is 62.00 to 61.00. Outside markets weight on cotton. 1/6: 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: Possible bullish flag formation in recent days. Monday's high and low are important. Due for a correction lower, but may stage another short-term leg higher -first. 1/6: 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: A sloppy bull flag for June hogs and with prices hugging 100- and 200-day moving averages? I prefer a swing lower and then seasonal and long-term cyclical upswing into the summer grilling season. But the five-day stochastic has returned to midrange, which leaves the door open for a short-term swing in either direction. 1/6: 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: 1/7: Prices are likely to be weak on economy fears linked to China concerns, plus geopolitical tension. 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: 1/7: May not place a major low for another two to four weeks, but downside may be limited following last night's sizable extension lower.

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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: 1/7: The euro is likely to rally for a Level 3 cycle and so the dollar should correct. But intermediate Level 1 or 2 trends leave the door open for additional appreciation by the dollar the next few months. Trade above 100.51 for the index this month would likely mean support for the dollar index into April. But December's high was the second opportunity for a long-term three-year business cycle top.

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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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