RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

In Fri’s Technical Blog we introduced a peak/correction/reversal threat stemming from a bearish divergence in SHORT-term momentum that identified Fri’s 17.34 high as the end of the 5-wave rally from 01-Apr’s 15.65 larger-degree corrective low.  Per this momentum failure, the market has identified Fri’s 17.34 high as one of developing importance and our new short-term risk parameter from which non-bullish decisions like long-covers and cautious bearish punts can be objectively based and managed.

It is fully acknowledged that this short-term mo failure is of an INsufficicent scale to conclude anything more than another corrective hiccup within the still-arguable secular bull trend as we cannot conclude a major top from proof of only short-term weakness.  Given yet-to-be-confirmed but compelling ancillary elements of a peak/reversal-threat environment on a broader scale however, traders and longer-term commercial players are advised to be on the lookout for continuing lateral-to-lower price action in the weeks ahead that could start to tilt longer-term directional scales lower.  This said, until Fri’s 17.34 high and short-term risk parameter is taken out, we can use that level as an objective risk parameter from which to base and manage pre-emptive and admittedly early bearish decisions like the bear hedge strategy we discuss below.

As detailed Fri, a failure below 01-Apr’s 13.94 larger-degree corrective low remains MINIMALLY required to break even the portion of the secular bull market from 01Dec21’s 12.05 low, let alone threaten the 3-YEAR secular bull trend from May’19’s 7.91 low.  Nonetheless, the broader peak/reversal-threat elements of:

  • historically stratospheric sentiment/contrary opinion levels
  • waning upside momentum on a weekly scale (confirmed below 13.94)
  • an arguably complete 5-wave Elliott sequence from Dec’21’s 12.05 low and
  • the Jul contract’s proximity to 2012’s all-time high

are lying in the weeds until and unless deferred or mitigated by a recovery above 15.41.

The key by-product of Fri’s bearish divergence in short-term momentum is the market’s definition of specific and more reliable resistance at 15.41.  Until and unless this high is broken, it serves as a risk parameter from which non-bullish decisions like long-covers, cautious bearish punts and even pre-emptive producer bear hedges can be objectively based and managed.  A recovery above 15.41 nullifies Fri’s bearish divergence in momentum and reinstates the secular bull to levels indeterminately higher thereafter.

PRODUCER BEAR HEDGE:  SHORT JUN SHORT-DATED 15.00 – 15.30 CALL SPREAD / LONG JUN SHORYT-DATED 14.40 PUT COMBO

As the name implies, this bear hedge strategy involves selling the Jun Short-Dated 15.00 – 15.30 Call spread for about 9-3/4-cents and buying the Jun Short-Dated 14.40 Puts around 11-3/4-cents for a net cost of about 2-cents.  This strategy provides:

  • a  current net delta of -38%
  • favorable margins
  • fixed risk/cost of 2-cents if the underlying Nov contract settles anywhere between 15.00 and 14.40 at expiration 25 days from now on 20-May
  • fixed, maximum risk/cost of 32-cents on ANY continued rally in the secular bull trend above 15.30, allowing the producer’s cash position to continue to profit
  • virtually unlimited, dollar-for-dollar downside hedge protection below its 14.38 breakeven point at expiration.

A recovery above Fri’s 15.41 high in the Nov contract reinstates the secular bull and nullifies this and any other bearish strategy, warranting its cover.  Until such strength is shown, this strategy will provide downside hedge protection if new crop surprises us with a sustained, trendy move south right out of the gate (something we do NOT anticipate happening given a broader peak/reversal PROCESS typical of such reversals of massive secular bull markets as the underlying forces that have driven it our unlikely to evaporate quickly, but rather take time.

Please contact your RJO representative for an updated bid/offer quote on the Short Jun SD 15.00 – 15.30 Call Spread / Long Jun SD 14.40 Put Combo.

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