|
USDA
Estimates Hold Grains Captive
It
is a regular event. Traders await USDA crop reports to determine
whether to buy or sell… so they say. However, anyone who
has traded over the past two decades should realize that most of the
information is already reflected by the price. Certainly, there
have been surprises, yet, few of these ever resulted in setting a
long-term trend. Yes, a pop or dip is possible or even probable,
however, prices usually return to their prior pattern within relatively
short periods.
When
we experience a fundamental shift in perspective, it is reflected by
definitive changes in trading that appear on charts or through other
technical indicators. Of course, there can always be an
application of fundamental logic when interpreting charts. If you
know certain information will impact a market, then you can seek to see
when this information is beginning to exert its influence.
Interestingly, I was writing a promotional letter for the daily COMMODEX®
System that touched upon technological advances in agriculture that
included the practical elimination of corn leaf blight and high
tolerances for overly dry and overly moist growing conditions.
Thus,
over the two decades, weather has played a decreasing role in
determining the outcome of grain production. For traditionalists,
it is a frustrating experience because we are accustomed to interpreting
fundamental data based upon old assumptions. The only exception
might be winter wheat that is more susceptible to root damage if
subjected to severe freeze/thaw cycles.
With
this in mind, I expected the possibility of a rally coming into the
reports based upon uplifted export prospects as well as the final
discounting of a high or higher crop forecast. With the 4.45 –
4.55 gap looming in January beans, I decided to reverse our short to a
long in expectation of an attempt to fill this target.
We
have a potential “V” bottom that projects to resistance at 4.55.
Thereafter, I turn cautious about upward momentum because fundamentals
remain extremely sluggish. Even if we accomplish the same or
higher exports over last year, the balance does not currently point to
prices appreciably above 4.70. Thus, any long side profit appears
limited. For perspective, consider the May 2001 chart.
Obviously,
my attempt at a quick buck resulted in a $250 stop out. With
today’s decline, I may feel it is just as well, but if the gap fills,
I’ll be telling myself, “I told you so!
Notice
how the market bottomed at 4.24 just before spring fever rallied as
expiration approached. If comparative fundamentals are any
indication, we are in the same boat as last year with the addition of
extra supplies and equivalent export sales.
Domestic
meat and poultry production does not offer salvation. Although
there was hope for greater expansion based upon firm prices earlier this
spring, numbers suggest flat consumption through the first quarter.
Cattle and hog producers have hedged supply requirements through
November if you look at the CFTC commitment estimates.
A
number of traders have been anxiously awaiting a breakout in wheat.
Prior to the September 11th attacks, a more bullish consensus was
emerging… including my own. Last year’s production was
called a “deficit” even though prices hardly reflected a
shortcoming. In the wake of the smallest acreage in decades, wheat
proved to be resilient with higher yields. In my usual fashion, I
preferred the bull spread to the outright position. Indeed, this
conservative approach proved more effective.
This
year, I am attempting the same using the same assumption. If the
crop comes up deficient, there will be a squeeze on old crop. I am
satisfied to take a chunk out of a cheaper margined spread and leave the
bigger stuff to those willing to accept more risk. Some who
were caught in the post attack downdraft accused Cargil and others of
selling them out. It is a nice theory, but wheat’s subsequent
performance suggests a lack of support regardless of Cargil or other
major grain houses.
March
wheat needs to overcome 3.03 resistance to prove technically
encouraging. The question is whether this price will prove
sufficient to motivate more planting. If we see another year like
1999/2000 and the last season, wheat should challenge 3.50 before the
December expiration.
In
the meantime, we remain short corn because technical and fundamental
tracks are different. I do not believe rumors of abandonment in
southeast and north central growing areas. I have enough friends
throughout the country to verify or contradict this assertion.
Although I was taken in by the possibilities earlier this summer, when
skies cleared, the damage turned out to be inconsequential.
Of
course, there should be “a bottom.” At some stage, the crop
has value. The only sign of caution for short traders is the
possibility of a bottom formation as indicated on the December chart.
Notice how the slope of the decline has gone flat. Obviously,
there are fewer sellers willing to accept falling prices. This is
opposed to buyers who will pay a better price. Essentially, we are
seeing equilibrium. If enough sellers step back, a 10¢ rally
would not be unreasonable.
That
would put prices back into prior resistance.
Meats
I
have been fortunate to have correctly assessed this complex over the
past several years. It has gotten to the point where a fair number
of subscribers claim they take the FORECAST “just for the meats.”
I can hardly consider that a compliment since I like to think I have a
more broad perspective and success rate!
By
now, I am sure many of you have heard the correlation to a falling
Consumer Confidence Index. Frankly, I have never placed much faith
in the calculation of this amorphous index because I don’t think
confidence is measured using the parameters stated. Still, it
doesn’t take a genius to observe that people are less than
enthusiastic about economic prospects. Does this mean they are
cutting back on steak and pork chops? I can’t say the
assumption is axiomatic, but retail movement has been slow. ‘Tis
the season for poultry and pork. That is “supposedly” why lean
hogs have remained firm as live cattle and feeders challenge new
contract lows. I finally got the collapse in live cattle I was
looking (actually, hoping) for to prove the interpretation of a
“pennant” or “flag” was correct.
I
was seeking a 6827 objective to move our stop down. This was made
today. I was amazed when prices bounced from this level because I
was thinking that 6800 would offer interim support. Examine the
long-term monthly chart. While it is not precisely clear, notice
how prices gravitated toward 6800 since 1987. This provides a
“reference price” as I explained in my book, “TechnoFundamental
Trading.”
Under
present circumstances, I would not be surprised to see 6800 fail with a
new downside of 6545. As with other commodities, we are on the
deflationary side of the cycle.
I
would like to sell lean hogs and pork bellies, too. Sadly,
volatility kept me away after failed attempts to pick a good short-side
entry. Even with the past two day collapse, I believe we could see
another 2¢ decline in February lean hogs. The question is whether
a position is worth the risk.
Calling
the past week a “flag” is a stretch… although you can draw
the lines. If it is a flag, I would expect 5500 to be breached.
The more likely scenario is a dip to 5200 and a possible test of 5000
support. Observe the monthly long-term chart. See how
considerable price action gravitates toward 4800. When lean hogs
first replaced live hogs, I was thrown off-course because I expected an
8¢ to 12¢ premium over my former reference ranges. This
assumption proved incorrect because the hog market was changing.
Large producers operated on different cost margins.
For
years I have warned traders about “structural changes” in various
markets. Commodities like grains, metals, and meats have all
undergone these alterations that ultimately impact price ranges and
interpretation. If you substantially and permanently lower
production costs, it will eventually show up in the selling price.
If you no longer use silver for picture-taking, it will impact prices.
The
monthly chart shows how close we are to the “median” price. I
would cautiously expect 4800 to offer support until we come through the
holidays. This year, we must be careful. Lethargy and travel
apprehensions could diminish holiday gatherings and curb those turkeys
and hams. That could take lean hogs to 3800 or less!
Interest
Rates
I
covered interest rate contracts more extensively in the previous two
REPORTS. This week I had an opportunity to talk with a “variety
of opinions” and came away with a consensus that demand for 30-year
paper was likely to wane with the most recent drop in rates.
Currently, short-term rates are nonexistent. But, the purpose of a
30-year bond is to lock in an attractive rate over time with lower risk.
At some point, the yields simply aren’t good enough. The chart
may reflect this.
Since
we were stopped out of our long position with a 325% profit, it may be
time to relax on the sidelines.
The
½-point cut in FED Funds tickles my inclination to court the Euro.
Perhaps I’ll take up with my old theory that Europeans will be
converting back into Euros before the January 1, 2002 introduction of
bills and coins. After all, lower U.S. rates couldn’t hurt!
Email:
Phil@commodex.com
|
