Grains have shown Relative Strength to the Weak Stock Market

Posted on 03/09/2017 10:25 AM

Wheat: July SRW futures are due for a Level 4 intra-week cycle low today or tomorrow. This would also be the first opportunity for a Level 3 intra-month cycle low that last bottomed during the first week of this month. Although the five-day stochastic is not oversold and it is slightly below midrange, the spread is narrowing, which suggests a buy signal can occur on a positive reversal. For now, assume the short-term trend is down until a close above yesterday's high at $4.79. This would increase odds the larger intermediate Level 1 and 2 trends are of bullish development. 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 dip into a Level 3 cycle low is still due and the market is short-term overbought, but as of overnight trade the trend was still up. A negative close could say otherwise. February is likely to be an up month, but the usual ratchet process can still cause a dip in coming days. Prices for the July contract are at the 40-day moving average near $3.78. If seller interest is not at that level and buyers are not finished, then resistance would be daily highs up to around $3.90. Tech Talk was updated yesterday with a 36-year cycle analog that showed the 2014 and 2015 lows were near average for lows within such a cycle and since 1720. I also wrote of a nine-year cycle with 21 repetitions that showed on average corn would bottom this month and dating from the last said low made in 2005. The cycle model, however, shows such a low was placed a while ago and the market has been base building. 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: I am allowing an alternative forecast that states soybeans made a Level 2 cycle low as a truncated bottom on Jan. 12, which was a USDA report day. And it was a major positive reversal on high volume, which means fundamental and technical were in agreement relative to trader post-report sentiment. If this is correct, then prices should trade in a range of $8.70s to around $9.00 for the July contract through next week with chance for an upward bias. The overall trend should then have a more upward bias in February due to an intermediate trend that is up from Jan. 12. If this cyclical opinion is incorrect then prices may return to the $8.60s over the next two weeks, but should then work higher in February. The overnight lower trade may be a sign a downswing is in the works, but a close above yesterday's high at $8.91 3/4 will make the alternate forecast the preferred model script. 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: The trend is down into a Level 3 cycle low due ideally this week, but may delay until the start of next week. This downswing would be allowed for a late placement of the far more important Level 1 cycle low, otherwise the July contract should only retrace a portion of the recent rally as the January low was likely a Level 1 cycle bottom. Higher prices are forecast for February. 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: Funds liquidated longs at too fast of a pace and bears likely covered some shorts yesterday. But early trade today is suggesting an extension of the downtrend since the December high. Today's lower prices likely relate more to stock market concerns. And the rout in equities has likely caused investors to be too short the market, cotton and stocks. 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 June contract showed signs of stability following gap filling seen last week. At Tech Talk the model forecast shows that the trend is down into a Level 2 cycle low due early next month, but prices are allowed to now trade sideways into said bottom. 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: At Tech Talk, the June hog chart shows it has likely taken too long for a Level 2 cycle high, which offers support into March to April. But this does not negate a setback into a Level 2 cycle low due now to the first week of next month. It does however suggest a possible reduction in downside potential despite still large supplies of pork. 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: 1/19: Second contract continuous chart looks impressive for yet another opportunity for a long-term three-year cycle bottom. Just a nice start though. September C3 enters window of reversal for Level 1 cycle last of this week. The earliest allowed. Five-week stochastic made a buy signal last 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: In my opinion the U.S. market dragged China lower last night, but one could argue other Asian nations led the way. The S&P 500 is near its August low and I think high frequency trading has exaggerated the January drive lower. Expecting a major cyclical low today into first week February. Favor this month.

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Economy: 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: 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: 1/19: Trade below $28.57 for spot chart (Feb.) creates Critical Point objective for $27.61 to $27.06. Level 1 cycle low is due. Three-year cycle bottom remains evasive. Ethanol: Only a start, but last week's positive reversal was at a time for an intermediate business cycle low. Oversold five-week stochastic made a buy signal. 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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