Posted on Nov 08, 2023, 10:57 by Dave Toth
On even a short-term basis, this market has done little to suggest the secular bear market drubbing is anywhere near complete, so there’s no adjustment needed by producers relative to established bear hedges. The only hedge-paring or neutralizing adjustment needed would be if/when the Dec contract recovers above at least 26-Oct’s 4.85 smaller-degree corrective high and short-term bear risk parameter and/or 20-Oct’s 5.10 larger-degree corrective high and key longer-term bear risk parameter.
Conversely, IF IF IF there’s going to be any surprise coming out of tomorrow’s crop report, we’d surmise that it would be to the upside and pertinent to end-users. Per such, below we discuss a conservative but effective bull hedge strategy that has very limited and fixed risk if tomorrow’s report confirms no surprise and the secular bear trend resumes. But first we’ll address this market’s technical construct.
As updated in 01-Nov’s Technical Blog following that day’s break below 25-Oct’s 4.77 low, 26-Oct’s 4.85 high remains intact as the latest smaller-degree corrective low and short-term risk parameter this market remains required to recoup to break late-Oct/early-Nov’s downtrend and expose another intra-range rebound that would be considered the continuation of the bear market correction/consolidation from 19-Sep’s 4.68 low. If the market can recoup 4.85, we’d suspect a sharp (C-Wave) return to the upper recesses of the past month-and-a-half’s range where 20-Oct’s key 5.10 high may come into play. Until/unless the market recoups 4.85, a resumption of the major bear to new lows below the 4.68-area that has thus far held for the past month-and-a-half. And below 4.68 are NO levels of any technical merit to consider as support.
On a broader basis, the daily log high-low chart above and close-only chart below show that the market has yet to recover above levels needed to defer or threaten the major bear market. Smaller- and larger-degree corrective highs and risk parameters are clear at 4.85 and the 5.05-to-5.10-area. This said, the bear hasn’t made much headway over the past couple months, and some say, “Never sell a dull market”. Per such, traders need to be aware of a crop report-fueled poke above 4.85 that could lead to a sharp (C-Wave) pop to the upper recesses of the month-and-a-half range, and this where a cautious but favorable risk/reward bull hedge strategy may come into play for end-users.
Stepping out even further, the weekly log active-continuation chart below shows the magnitude of the secular bear market, understandably historically bearish sentiment/contrary opinion levels and waning downside momentum. No, it’s not hard to find BASE/reversal-threat elements. The only thing needed to render these elements applicable is a confirmed bullish divergence in momentum of a sufficient scale. A bullish divergence above 4.85 is NOT of a sufficient scale to conclude a larger-degree correction or reversal higher. Indeed, commensurately larger-degree strength above 5.10 is required for this. However, larger-degree momentum divergences always start with smaller-degree divergences like one above 4.85.
These issues considered, a bearish policy and exposure remain advised with a recovery above 4.85 sufficient for shorter-term traders to move to a neutral/sideline position if not a cautiously bullish stance. Commensurately larger-degree strength above 5.10 remains required for longer-term commercial players to follow suit. For end-users wanting/needing to position for a bullish surprise from tomorrow’s report, please see the call back spread strategy below.
END-USER BULL-HEDGE: DEC 4.70 / 4.80 CALL BACK SPREAD
Into the teeth of a major bear market, a call back spread strategy is appropriate due to fixed and negligible risk if the major bear trend continues. This strategy involves selling 1-unit of the Dec 4.70 Calls around 11-1/2-cents and buying 2-uis of the Dec 4.80 Calls around 6-1/2-cents for a net initial cost of around 1-1/2-cents. This strategy provides:
- a current net delta of +24%
- fixed and maximum risk/cost of 1-1/2-cents on ANY decline below 4.70
- maximum risk/cost of 11-1/2-cents if the underlying Dec contract settles at 4.80 16 days from now at expiration on 24-Nov
- unlimited dollar-for-dollar upside hedge protection above its 4.91-1/2 breakeven point at expiration.
In effect, this strategy is a bet on a MOVE AWAY FROM current 4.77-area prices as a direct result of tomorrow’s key crop report. Please contact your RJO representative for an updated bid/offer quote on this strategy and good luck on tomorrow’s numbers.