Soybean Direction Hinges Around 2-Bit Range; Option Strategies to Engage Key Crop Report | RJO Futures

May 9, 2017 12:08PM CDT

NOV SOYBEANS

In 13-Apr's Technical Blog we introduced the prospect for a correction or reversal higher following the prior day's bullish divergence in momentum.  Nearly four weeks on the directional jury remains out as to whether the recovery from 11-Apr's 9.41 low is a correction within a still-developing broader downtrend from last Nov's 10.43 high OR the start of a more extensive reversal higher.

Yesterday's very short-term momentum failure below last Thur's 9.61 corrective low confirms a bearish divergence in momentum that identifies Fri's 9.74 high as one of developing importance.  But relative to the past month's rebound this very short-term mo failure is insufficient to conclude anything more than an interim corrective dip ahead of further gains.  Nonetheless that 9.74 high serves as a very, very tight but yet objective risk parameter from which scalpers can base and manage the risk of any non-bullish decisions like long-covers and cautious bearish punts.  And per any bearish bias it is interesting to point out that the (prospective c-Wave) rally from 28-Apr's 9.49 low spanned an identical length (i.e. 1.000 progression) to mid-Apr's initial counter-trend (prospective a-Wave) rally from 9.41 to 9.66.

To render the recovery from 9.41 a 3-wave and thus corrective structure consistent with a broader bearish count the market is still required to fail below our short-term risk parameter defined by 28-Apr's 9.49 corrective low.  In effect the market has defined the 9.74 and 9.49 boundaries of this 2-bit range as the key directional triggers heading forward.

Soybeans 60 min Chart

Soybeans Daily Chart

Looking at the daily log scale chart of the Nov contract above, there is no question at all that the extent of the past month's recovery falls well within the bounds of a mere bear market correction.  HOWEVER, at least the intermediate-term trend is, in fact, up with a failure below 9.49 minimally required to threaten it.  COMBINED with a return to historically bearish sentiment and the market's rejection thus far of the (9.45) 50% retrace of the entire Aug'15 - Nov'16 rally from 8.57 to 10.43 and it's not hard to empathize with and acknowledge a BASE/reversal-threat environment.

It is no surprise currently to anyone that the fundamental picture for beans is overtly bearish.  Fine.  Then all the market's gotta do is slip below our short-term risk parameter at 9.49, render the past month's recovery a 3-wave and thus corrective event and we can be off to the bearish races again.  The market's subsequent downside potential below 11-Apr's 9.41 low would be indeterminable and potential steep.  UNTIL such sub-9.49 weakness is proven, the greater "surprise" would certainly come from a bullish shocker in tomorrow's crop report.  And with our RJO Bullish Sentiment Index at 39% reflecting 87K Managed Money long positions to 135K shorts, it's not hard to find a source of fuel for upside vulnerability.

Market sentiment/contrary opinion analysis is a key component of our research.  The longer-term charts below show the huddled mass of market lemmings clearly bullish at major peaks and bearish at major bottoms instigated and reinforced by the headline news that is also typically bullish at most or all peaks and bearish at major bottoms.  This has always been the case with all markets and likely always will.

Should the market fail below 9.49 and then ultimately below 9.41, market sentiment will be off the table as an applicable technical tool and will NOT inhibit potentially steep losses.  While that 9.49 low and support remains intact, bears may be tempting fate here at 9.68-area prices.

Soybeans Weekly Chart

Soybeans Weekly Chart

Traders are reminded of our very long-term count that contends that Nov'15's 8.44 low ENDED the secular bear market from Sep'12's 17.89 all-time high and that all of the price action from that low is that of a major base/reversal PROCESS similar to those that followed the Dec'08 low at 7.76 and Feb'05 low at 4.98 circled in blue in the monthly log scale chart below.  Within this process the relapse from Jun'16's 12.09 high is considered a (B- or 2nd-Wave) correction of the initial 8.44 - 12.09 rally.

We've discussed often the likelihood that this correction could be "extensive" in terms of both price (retracement) AND time, similar to BOTH of the bull-market corrections that followed Dec'08 - Jun'09 and Feb-Jun'05 initial counter-trend rallies.  And this correction could indeed still contain another sharp, emotion-filled collapse to sub-9.00 levels prompted by a report like tomorrow's.  But the bear will have to SUSTAIN that downtrend to eventual new lows below 8.44 to negate this long-term bullish count.  Any bullish divergence in momentum from, say, sub-9.34 levels could provide a risk/reward buying opportunity for the ages.

These issues considered, a cautiously bullish policy and exposure remain advised with a failure below 9.49 quickly tipping the scales the other way, and potentially violently, warranting a reversal into a cautious bearish policy.  Further gains above last week's 9.74 high and micro risk parameter will reinforce this call and expose further and potentially accelerated gains.  In effect, traders are advised to toggle directional biases and exposure around 9.49.

Please see hedge and spec option strategies below that are structured around the recent 9.50-to-9.75-range.

Soybeans Monthly Chart

 

PRODUCER BEAR HEDGE:  SHORT JUN SHORT-DATED 9.70 - 9.90 CALL SPREAD / LONG JUN SHORT-DATED 9.50 PUT "COMBO"

For producers looking to hedge their immediate downside risk, we recommend selling the Jun Short-Dated 9.70 - 9.90 Call Spread for around 5-1/2-cents and buying the Jun Short-Dated 9.50 Puts around 4-cents for a net CREDIT of 1-1/2-cents.  This strategy provides:

  • a current net delta of -0.51
  • favorable margin rates
  • a 1-1/2-cent profit of the underlying Nov contract settles anywhere between 9.70 and 9.50 at expiration 17 days from now on 5.27
  • fixed, maximum risk/cost of 18-1/2-cents on ANY rally above 9.90 that will allow the cash position to continue to profit
    • (NOTE: this cost/risk may be able to be reduced if this strategy is covered if/when the market breaks above 9.75)
  • virtually unlimited, dollar-for-dollar downside hedge protection below its 9.51 breakeven at expiration.

Broker Daily Chart

 

END-USER BULL HEDGE:  SHORT JUN SHORT-DATED 9.60 - 9.40 PUT SPREAD / LONG JUN SHORT-DATED 9.80 CALL "COMBO"

This strategy is basically the inverse of the bear hedge detailed above for producers and involves selling the Jun Short-Dated 9.60 - 9.40 Put Spread for about 5-cents and buying the Jun Short-Dated 9.80 Calls around 7-cents for a net cost of 2-cents.  This strategy provides:

  • a current net delta of +0.56
  • favorable margin rates
  • 2-cent risk if the underlying Nov contract expires anywhere between 9.60 and 9.80 at expiration 17 days from now on 5/26
  • fixed, maximum risk of 22-cents on ANY collapse below 9.40
    • (NOTE: this risk can be reduced if this strategy is covered on a failure below our technical risk parameters at 9.49 or 9.41)
  • unlimited, dollar-for-dollar upside hedge protection above its 9.82 breakeven at expiration.

Broker Daily Chart

 

BEAR SPEC:  JUN SHORT-DATED 9.50 / NOV 8.40 PUT DIAGONAL

For speculators looking to cautiously bet on the bearish fundamental scenario and buck the intermediate-term uptrend, we recommend buying the Jun Short-Dated 9.50 Puts around 4-1/4-cents and selling the Nov 8.40 Puts around 5-cents for a net 3/4-cent CREDIT.  This strategy provides:

  • a currently net delta of -0.13
  • whopping 7:1 gamma ratio
  • negligible risk if the past month's recovery starts to accelerate higher
  • profit potential of up to 1.10 if the market sustains a break below 9.50 over the next two weeks that will see the long 9.50 put component of the trade turn into an aggressive short futures contract.

As is always the case with long-gamma strategies, time decay, or theta works against the position under boring, lateral trading conditions.  Heading into a crop report that has the potential of being one of the more impactful reports of the year, this strategy bets on MOVEMENT, either way.  If, tomorrow's report is a total dud and the market flat-lines over the course of the next week or so, the long put will erode faster than the short put and traders would be advised to simply cover the entire strategy and take what should be a small loss.  In the meantime this diagonal spread allows one to place a bearish bet on tomorrow's report AND get a good night sleep tonight.

Please contact your RJO representatives for updated bid/offer quotes on th4ese strategies.

Broker Daily Chart

RJO Futures | 222 South Riverside Plaza, Suite 1200 | Chicago, Illinois 60606 | United States
800.441.1616 | 312.373.5478

This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.