Traders a Bit Too Bearish Ahead of Reports

Posted on 03/09/2017 10:25 AM

Wheat: USDA surprised traders with 2.711 million acres less of winter wheat seedings than expected. This caused HRW futures to be the leader of the three flavors, but the July SRW again paused near the 40-day moving average around $4.79 5/8, which is considered major resistance. Closes above it would be a sign of extending buyer interest that could return prices to around $5.00. The nearly overbought five-day stochastic is sensitive to a down turn, so a lower close may trigger a sale. But the highs of the Level 3 cycle trends are sloppy, which suggests although a low is due next week, the market may work higher before correcting. With larger cyclical trends neutral to down to near month-end, upside potential is likely limited. And the downside is also likely limited in that on a long-term basis most global wheat markets are oversold. Watch the response to the five-day moving average near $4.79. In the news: warm temps raise wheat crop concerns in India. 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.

Corn: USDA lowered 2015 corn yield to 168.4, which was a little more to my liking given that the crop condition model was in disagreement with the climate-based model. USDA showed a lower than expected Dec. 1 stocks, which caused traders to buy futures. Yesterday's wide bullish biased range was on a surge to a contract high in volume, but prices eased to midrange by the close, suggesting sellers were still present. There is a dilemma when this week's high is two days later than allowed and for weekly prices -one week late for a Level 3 cycle high. This suggests the trend of highs should be up into next week. A related low is due next week to early the following. But larger trends may be neutral to bearish for a major low later this month. And the five-day stochastic is sensitive to lower prices for a possible sale. The indicator is midrange, which suggests potential to swing in either direction. My guess is the report has changed attitude in favor of bulls, but it is a bit early for a lengthy sustainable rally. I favor a buy signal in the five-week stochastic, followed by a buy-the-dip opportunity. In next week's Tech Talk, I will exhibit a 36-year cycle analog study that I have used since the mid-2000s that assisted with the cyclical forecast for a major bull market during that decade. The study shows that on average since the 1700s, the 36-year cycle would have placed the 2015 low above that of 2014 and the 2015 high would be lower than the prior year. This is what occurred. The study offers a higher low and high for 2016. The 2008 high related to a 27-year cycle top that coincided with a peak of the 36-year analog study. The 2015 low was near the average low for all cycles in today's dollars anchored from a super cycle low made in 2005. 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: Traders bought soybean futures on lower than expected Dec. 1 stocks, 2015 crop estimate and U.S. carryover. July futures rallied sharply to a band of major resistance of the 40- and 100-day moving averages from $8.85 to $8.91, respectively. Volume surged to a contract high. But the five-day stochastic struggles higher and a Level 2 cycle trend does not offer much for upside potential until low is made later this month. But yesterday's high should have been too late for an intra-month Level 3 cycle top. This suggests the trend of highs should be up, while the trend of lows should be neutral to down. I think we have probably seen the lowest of price for the Level 2 cycle, but the cyclical bottom is still due. A buy signal from the nearly oversold five-week stochastic should not be ignored, but waiting for a dip may be the better strategy this month. 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: July futures may rally to the five-week moving average near $285.80. The oversold five-week stochastic may make a buy signal at close of this week, which may be evidence a Level 1 cycle low was finally made and as of this month. Although taking an extra month, the best forecast is that a Level 1 low was made in June for the continuous chart and it bottomed as of Jan. 4. 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: USDA raised its yield by a pound, cut harvested acres more than a raise in plantings. It lowered domestic use, which slightly more than offset the cut in production. Futures are short-term oversold and the five-day stochastic is leaning toward the long side. 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: June futures are short-term oversold. This may limit downside potential into next week. A rebound is allowed for the Level 3 cycle despite larger trends as neutral to slightly bearish. 1/11: Prices correct from an intermediate cycle high with a related low due early next month. If the three-year cycle bottomed in December then the lowest price is likely to occur early and the market then evolves into range trade into said bottom. For the February contract the 40-day moving average is nearby support around $123.38 for the June contract. 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: This week's bounce is a sign of strength, but the five-week stochastic for continuous and June charts is overbought. Last week's low for the June contract is now important support. Funds seem to have an appetite for long futures despite heavy pork production. Are they gearing up for the summer grilling season -already. 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: 1/11: September C3 futures are trending lower into a Level 1 cycle low due late this month to early next. The spot market may place said low sooner and along with a three-year business cycle bottom. Need to see support for cheese prices this quarter as sign of three-year cycle bottom. For short-term traders, a Level 3 intra-month cycle should cause a positive reversal pattern this week. 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: 1/12: Daily volatility will likely remain high. The market should correct until later this month for a major cyclical low. The long-term forecast remains bullish. The Chinese market is down into a major low due later this month.

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Economy: 1/8: Polls had suggested 200,000 jobs created in December, but today's nonfarm payrolls report showed 292,000 jobs were added. This alongside strong consumer sentiment/confidence provides an offset to worries over recent manufacturing performance. The cyclical analysis still calls for a growing economy 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: 1/10: Stalled three-year cycle bull market that began in early 2015 for the 10-year Treasury Note. Limited up and downside potential this month.

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Dollar: 1/10: Acting bearish against the yen. Dollar index should correct first-half 2016, but trade above 99.634 would likely mean support into a Level 2 cycle high due next month.

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Energy: Oil: 1/8: Although a Level 1 cycle low may not occur until three weeks from now for the latest allowed, using the clock like model, the low should occur this week or next with this week favored. And the oversold five-week stochastic was long from a buy signal made week of Dec. 25, which was an early call for the continuation chart. Open interest has surged in recent weeks, which I view as an overreaction by bears. A Level 1 bottom would be another opportunity for a long-term three-year cycle low. Ethanol: 18: Due for a Level 1 cycle low. Natural Gas: 1/8: Level 1 cycle low placed in December. A three-year cycle bottom was likely posted, but more upside and proof of sustainability is required. 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: 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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