Posted on Oct 11, 2023, 10:26 by Dave Toth

Starting on a very short-term scale, the hourly chart below shows the past three weeks’ clawing recovery that has yet to recoup 29-Aug’s 5.00 corrective high this market remains required to break to confirm a bullish divergence in daily momentum needed to break Jul-Sep’s portion of the secular bear trend from 5.72 to 4.68.  Per such, this 5.00 threshold remains intact as a short-term but key bear risk parameter.

This hourly chart also shows last week’s continuation of the 3-week recovery leaving 04-Oct’s 4.82 low in its wake as a smaller-degree corrective low the market would be expected to sustain gains above to maintain a more immediate bullish count.  A relapse below 4.82 won’t necessarily negate a broader base/correction/recovery count, but it would defer or threaten it enough for very short-term traders to pare or neutralize bullish exposure.  If bullish exposure is not addressed on a failure below 4.82, 29-Sep’s 4.75 low and/or 19-Se’s obvious 4.68 low are the only remaining objective bull risk parameters for shorter-term traders.

On a broader scale, over the past couple week’s we’ve discussed this market having “a pulse” after months and months of new secular bear market drubbing.  The market has confirmed a bullish divergence in very, very short-term momentum that has evolved into a 3-wave recovery attempt thus far.  To take this recovery to the next level or scale, the market needs to break above 29-Aug’s 5.00 corrective high needed to confirm a bullish divergence in daily momentum and expose a correction of Jul-Sep’s portion of the bear from 24-Jul’s 5.72 high to 19-Sep’s 4.68 low.

A clear break above this 5.00 level exposes an area totally devoid of any technical levels of merit shy of 21-Jul’s 5.37 larger-degree corrective high on a weekly log close-only basis below.  What this market might have in store for us between 5.00 and 5.37 is anyone’s guess, but with our RJO Bullish Sentiment Index at a historically low level of only 33%, traders are urged not to underestimate this market’s upside potential above 5.00.

As stated above, a relapse below 4.82 won’t necessarily negate a broader base/correction/recovery count, but it would at least defer or threaten it enough for shorter-term traders to neutralize cautious bullish exposure and acknowledge and accept whipsaw risk in exchange for steeper nominal risk below 19-Sep’s 4.68 low.  In effect, and heading into tomorrow’s key crop report, we believe this market has identified 4.82 and 5.00 as the key directional flexion points and risk parameters heading forward.

Complicating matters, especially heading into a key crop report, the monthly log chart below shows this market’s reversion to deep, deep, within the middle-half bowels of its massive but lateral historical range, where the odds of aimless whipsaw risk are approached as higher, warranting a more conservative approach to directional risk assumption and the need to be flexible to either directional outcome.  Per such, we discuss both bull and bear hedge strategies below.

In sum, a cautious bullish stance remains OK for short-term traders with a failure below 4.82 threatening this call enough to warrant its cover.  A bearish policy remains advised for longer-term players with a recovery above 5.00 sufficient to pare or neutralize exposure in order to circumvent the heights unknown of a bigger correction higher.

PRODUCER BEAR HEDGE:  NOV 4.85 / 4.75 PUT BACK SPREAD

While all previously recommended bearish policy and exposure remain intact for longer-term commercial producers, for those looking to replace or add to such policy under the technical circumstances described above, we recommend the Nov 4.85 / 4.75 Put Back Spread.  This strategy involves selling 1-unit of the Nov 4.85 Put around 8-cents and buying 2-units of the Nov 4.75 Puts around 4-3/8-cents for a net initial cost of about 3/4-cent.  This strategy provides:

• a current net delta of -12%
• maximum risk/cost of 3/4-cent on ANY sustained rally/reversal above 4.85
• maximum risk/cost of 11-cents if the underlying Dec contact settles at 4.75 at expiration 16 days from now on 27-Oct
• virtually unlimited dollar-for-dollar downside hedge protection below its 4.64 breakeven at expiration.

In effect, this strategy is a bet on a MOVE AWAY FROM current 4.85-area prices as a direct result of tomorrow key crop report.  If tomorrow’s report proves to be a total dud, potentially resulting in continued languishing, lateral prices, this strategy should be covered for what should be a small loss by the end of next week to avoid the maximum loss of 11-cents.

END-USER BULL HEDGE:  NOV 4.85 / 4.95 CALL BACK SPREAD

An equal but opposite Nov 4.85 / 4.95 Call Back Spread strategy is recommended for end-users as the P&L graph below shows small and maximum risk of only a penny if the secular bear trend resumes to new lows below 4.68.  This strategy involves selling 1-unit of the ATM Nov 4.85 Calls around 8-3/4-cents and buying 2-units of the Nov 4.95 Calls around 4-7/8-cents for a net initial cost of about 1-cent.  This strategy provides:

• a current net delta of +15%
• maximum risk/cost of 1-cent on ANY sustained collapse below 4.85
• maximum risk/cost of 11-cents if the underlying Dec contact settles at 4.95 at expiration 16 days from now on 27-Oct
• virtually unlimited dollar-for-dollar upside hedge protection above its 5.06 breakeven at expiration.

Here too, if tomorrow’s report doesn’t evoke a sharp move either way outside of our 5.00 and 4.82 short-term but key flexion points, end-users should look to cover this strategy by the end of next week to avoid its maximum risk/cost of 11-cents.

Please contact your RJO representative for updated bid/offer quotes on these strategies and good luck on tomorrow’s numbers.