Markets unPACKed: In Hindsight
These past couple of weeks have been….interesting. Escalating grain prices are frustrating some of the commercial hedgers we work with. Most of them sold their physical grain at much lower prices last summer. Farmers are nervous about the upcoming marketing year and adverse to pricing programs, (aka larger trading strategies in options). They seem drawn to cash sales and just buying calls to protect the cash sale.
(For those that have not been following agricultural grain prices: March 2021 corn futures are up 58% from their 52-week low of 331’4 on August 12, 2020. March 2021 soybean futures are up 66% from their 52-week low of 824’6 on April 24, 2020).
This market has left us to a lot of chatter around hindsight. In hindsight, someone shouldn’t have eaten a bat at a Chinese wet market. Alas, we are here. The point is, there is no need to play the hindsight game. It is time to be prepared for an active market. Are investors and commercial hedgers prepared for another sharp rally in price? What about a sharp reversal?
As we keep up with planting intentions, South America harvest, countries limiting grain exports (fundamental news), let us not overlook some key technical indicators, a few of which stuck out to our team today in corn and beans.
The Death Cross
To jog your memory, the death cross is a technical chart pattern that utilizes moving averages to indicate the potential for a major selloff. The most common moving averages used in this pattern are the 50-day moving average that crosses below the 200-day moving average. This signals a definitive bear turn in the market. While a helpful indicator, and an obvious one, at times the death cross has proved to be a false indicator. Nonetheless, in options trading, putting on an out-of-the money bearish trade may not cost too much. Additionally, it may provide a decent hedge if technical indicators prove correct.
In the CH1, the purple line is the 50-day moving average, the orange line is the 200-day moving average, and we saw the cross on January 20 at 9 a.m. central. However, if the 50-day MA gains in value and crosses above the 200-day, it could be a false indicator. The move is known as a Golden Cross, which is a bullish indicator. Consequently, it is worth moving on to other technical indicators or back to fundamental analysis.
The other indicator we reviewed today was the Central Commodity Index (CCI). If you are unfamiliar, CCI measures the current price level relative to an average price level over a given period of time. This indicator identifies overbought and oversold levels.
When the CCI moves above +100, a new, strong uptrend is beginning. This signals a buy. When the CCI moves below -100, a strong downturn is beginning, suggesting a sell signal. CCI is an unbound oscillator, meaning there is no upside or downside limits so interpreting this is subjective.
The blue lines below the main chart demonstrate the current CCI, which showed the price action of January 20 signaling a downturn. Today, January 21, we are back in the region where the indicator is lagging. Look to bottom blue line:
The same goes for soybeans:
So far, we have looked at comparative moving averages, an oscillator. Now let’s just look at Relative Strength Index for a quick glance at a momentum indicator. With an RSI dipping below 30 on January 20, again the momentum is bearish. However, again in the January 20 night session and into January 21 has the RSI back at 40 for both beans and corn. Many traders use the value of 50 as the support and resistance benchmark to this indicator. We broke below 50 earlier the morning of 1/21, so this indicator may be the one to focus on as we position ourselves, and hopefully not say “in hindsight.”
Corn, bottom lines:
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Disclosure: The risk of loss in trading futures and/or options is substantial. Past performance is not indicative of future results. The information in this message derived from third-party sources is believed to be accurate and reliable; PCC does not guarantee the accuracy or completeness of the information. Opinions expressed in this material are subject to change without notice. The material in this newsletter is not intended to be used as trading recommendations. This report should not be interpreted as a request to engage in any transaction of futures, options, and/or OTC derivatives. The information contained in this material is not to be relied upon in substitution for the exercise of your independent judgment. Seek independent financial, tax, legal and accounting advice from your own professional advisers, based upon your particular circumstances.Back