Grains Start 2016 on the Soft Side

Posted on 03/09/2017 10:25 AM

Wheat: Argentina wheat futures exploded in dollars to match peso devaluation. Inflation will eat away at gains made by farmers. Australian prices in that nation's currency broke down from 2015 support. Indian wheat is still within a bull market since March 2014. Expect another leg higher this month. Chinese spot futures are range bound with an upward bias since early 2015. Canada prices quietly work higher since the third-quarter and from a major low made in May. British wheat prices start the new year with an upswing. An intermediate intra-year cycle low was placed two weeks ago. European prices have drifted lower past three weeks on quiet trade and are due for a major intermediate cyclical low called Level 1. The July U.S. SRW wheat futures are testing the early December low as the five-week stochastic turns oversold. An intermediate cyclical low is due this month, but may wait until after the January USDA reports. Trade above $4.95 on a weekly close may be a sign of such a bottom. 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: South African prices remain in a long-term bull market. Brazilian spot futures trend higher since October and June cyclical lows. Mexican futures work lower, but within a range since July and up within a bull market since late 2014. Indian futures are stable following a correction during first-half December and prices are in a bull market since 2014. January Chinese futures have been in a strong uptrend since October. European prices declined sharply during late December. The five-week stochastic is extremely oversold and although it is getting late, an intermediate cyclical low is due. U.S. July corn futures are extremely short-term oversold and due for a Level 3 cycle low, which occurs once or twice per month. A positive reversal day would likely be a sign of such a low, while the more important sign may be a signal from the five-day stochastic. An intermediate intra-year cyclical low is due and the five-week stochastic is quite oversold. Watch for signs of support in the $3.60 area, but the intermediate cyclical low may not occur until after the January USDA reports. 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: Brazilian beans in dollars have been stable for seven weeks. The Chinese continuation chart shows a massive positive reversal in the works. Indian soybeans filled a gap for the continuation chart and are cyclically poised to rally. Canadian canola prices are within an uptrend since last November. European rapeseed prices consolidate within a long-term bull market. U.S. July soybean futures last placed an intermediate cycle low in November. A related peak occurred in December and the next low is due this month and it is likely to occur post USDA reports. But the continuation chart does allow a low as soon as around the report day. The daily chart studies show beans are short-term oversold. Support is around the Dec. 17 low at $8.66 1/4. 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: Chinese meal is range bound near 2015 lows. July U.S. meal futures are nearly a broken market. Response to intermediate cyclical uptrends has dwindled in past months. The five-week stochastic returned to oversold. 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: Chinese futures drift toward the December low, followed by a bear market low made in November. The decline has been of low volatility and an intermediate intra-year cycle low is due. Indian futures march higher within an uptrend since week of Oct. 30 and a bull market trend since early 2015. July U.S. futures have dipped to merging 40- and 200-day moving averages near 64.44 cents. The five-day stochastic is midrange and short the market. The contract corrects from a Level 1 cycle high into a related low due this month. This fits within a developing three-year business cycle bull market. 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: Trendline resistance for June live cattle futures is near $130.00 and the long five-week stochastic suggests there is still room for price appreciation for this Level 2 cyclical uptrend due to rising demand via futures. Open interest rose during the rally showing new longs were created, but volume remains low. This week's update at Tech Talk will show additional objectives that are above the trendline. Last week's surge in Choice boxed beef prices was a welcomed event for futures-based bulls. 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: June futures are well within the window of reversal for a Level 2 business cycle high as shown in Tech Talk. And the five-week stochastic is quite overbought. Pork cutout and cash hogs remain weak. Prices should swing lower into a Level 1 bottom this month. Funds have not offered much support, while commercials reduced short-side hedges. 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: 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: 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: 1/4: The euro is due for a Level 3 intra-month cycle low,which may have been placed with today's positive reversal. A return to 1.10-1.1044 would be normal even if the market is consolidating into an intermediate trend low due in early February. Larger trends offer a bullish stance this year.

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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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