Posted on Sep 11, 2023, 11:47 by Dave Toth
On the heels of 29-Aug’s bullish divergence in very, very short-term momentum above 4.97 that defines the 4.74-area lows from mid-Aug as the level that needs to hold IF the corn market is trying to bottom, the mere lateral, labored manner in which this market has tried to recover has correction/consolidation written all over it. Against the backdrop of the secular bear trend, MINIMALLY, 29-Aug’s 5.00 high should be required to even defer, let alone threaten the major bear. Per such, we’re defining 5.00 as our new short-term bear risk parameter from which shorter-term traders can objectively rebase and manage the risk of a still-advised bearish policy and exposure.
For even shorter-term traders trying to play this market as close to the proverbial vest as one can play it, that 4.74 level remains intact as a mini but objective parameter from which the risk of non-bearish decisions like short-covers can be objectively based and managed. Below 4.74 are NO levels of any technical merit to hold the market up.
The daily log chart (above) shows the past few weeks’ mere lateral chop that, against the backdrop of the secular bear market that dates from Apr’22’s high, is very likely only corrective/consolidative ahead of an eventual resumption of the major bear. Only a glance at the weekly log close-only chart of the dec23 contract is needed to see the magnitude and dominance of the secular bear trend that requires commensurately larger-degree strength above 21-Jul’s 5.37 larger-degree corrective high weekly close and/or 24-Jul’s 5.72 intra-week high to threaten. A bullish divergence in admittedly short-term momentum above 5.00 would be of an INsufficient scale to conclude anything more than another interim corrective hiccup. But given historically bearish sentiment levels, the extent of that hiccup would be indeterminable enough for shorter-term traders to step aside from bearish exposure and perhaps for producers to temporarily hedge still-require bear hedges (we’ll discuss this strategy below).
Lastly, the monthly log active-continuation chart below shows the well-intact multi-quarter peak/reversal process we introduced following the extent and 5-wave impulsiveness of Apr-Jul’22’s initial counter-trend decline and reiterated following early-Nov’22 momentum failure that ended Jul-Oct’22’s 3-wave and thus corrective rebuttal. The continuation of this major bear trend should hardly come as a surprise. And if there are any surprises, perhaps from a rogue crop report like tomorrow’s key report, we strongly suspect they would be only interim interruptions to the major and dominant bear trend.
These issues considered, a bearish policy and exposure remain advised with a recovery above 5.00 required for shorter-term traders to step aside and perhaps for even longer-term commercial players to pare bearish exposure to more conservative levels to reduce the risk of an interim corrective pop of indeterminable scope. In lieu of such strength and especially following a break below Aug’s 4.74 lows and support, further and possibly steep losses remain expected.
BULL-HEDGE: OCT SHORT-DATED 4.90 – 5.05 CALL BACK SPREAD
When considering an option strategy ahead of tomorrow’s key crop report, we’re first acting on the premise that producers have been fully hedged for some time now, so we’re going to refrain from offering any further bear hedge strategies. Rather, we wanted to discuss a BULL-hedge strategy in the event of a bullish “surprise” from tomorrow’s report that would apply to end-users and also to producers who might be interested in hedging the (bear) hedge. A call diagonal spread using the Oct SD calls versus the Dec calls came to mind. HOWEVER, we were rather shocked to find out that the Oct SD 5.00 calls were trading around same 12-cents area that the DEC 5.00 calls were trading at. To us, this means that the Oct SD 5.00 calls are either insanely expensive and/or that the Dec 5.00 calls are insanely cheap.
To take advantage of what we believe are “expensive” Oct SD calls, we advise selling 1-unit of the Oct SD 4.90 Calls around 19-3/4-cents and buying 2-units of the Oct SD 5.05 Calls around 9-cents for a total initial CREDIT of 1-3/4-cents. This call back spread provides:
- a current net delta of +31%
- a net CREDIT/profit of 1-3/4-cents on ANY resumption of the major bear trend below 4.90
- fixed/maximum risk/cost of 13-1/4-cents if the underlying dec contract settles at 5.05 at expiration 11 days from now on 22-Sep
- unlimited, dollar-for-dollar upside hedge protection above its 5.19 breakeven point at expiration.
In effect, this strategy is a bet on a MOVE AWAY FROM 5.05-area, with no risk if the major bear trend resumes and significant upside profit potential if there’s bullish surprise from tomorrow’s report. Please contact your RJO representative for an updated bid/offer quote on this strategy.