In a nutshell, the technical task at hand is trying to divine whether the past couple weeks’ recovery attempt is the B- or 2nd-Wave corrective rebuttal to May’s (A- or 1st-Wave) start of a broader peak/reversal count OR the (5th-wave) resumption of the secular bull to new highs as has unfolded in Nov beans. Patience and flexibility to either directional inevitability remains advised to traders of all scales. At this juncture, we don’t need to hash over the long-term peak/reversal elements that are in place but still need to be confirmed to the point of long-term bearish action.
Below, we discuss the key flexion points for both the old crop Jul contract still pertinent to commercial end-users and new crop Dec contract for producers as well as the most appropriate bull- and bear-hedge strategies given current acute circumstances.
As discussed in Mon’s Technical Blog, last Thur’s 6.52 low remains intact as the minimum level and micro risk parameter this market is required to fail below to raise the odds that the recovery from 26-May’s 6.03 low is a 3-wave and thus corrective affair consistent with a broader peak/reversal count while, obviously, 26-May’s 6.03 low remains intact as our key long-term risk parameter the market needs to break to confirm the reversal that could be major in scope. Until the market weakens below these levels, longer-term commercial end-users remain advised to hedge against a continuation of the secular bull.
Under broader peak/reversal-threat elements, the extent of May’s setback is not insignificant, leaving 07-May’s 7.35 high as THE level the market also obviously needs to recoup to reinstate the secular bull. End-users have the flexibility of either keeping bull hedges intact until this market fails below at least 6.52 and certainly 6.03 OR paring or neutralizing hedges until and unless required once again on a break above 7.35. Another option is the call backspread strategy discussed below and structured around current 6.87-area prices with these key flexion points in mind.
BULL HEDGE: JUL 6.80 / 7.00 CALL BACKSPREAD
This strategy is not only structured around current pertinent technical levels and conditions, but is also predicated on the market “moving sharply away from” current price levels as a result of tomorrow’s crop report. This strategy involves selling 1-unit of the Jul 6.80 calls for around 22-cents and buying 2-units of the Jul 7.00 calls for around 14-1/4-cents for a net cost of around 6-1/2-cents and provides:
- a current delta of +24%
- favorable margins
- maximum and fixed risk/cost of only 6-1/2-cents on ANY sustained break below 6.80 at expiration 16 days from now on 25-Jun
- maximum risk of approximately 27-cents if the underlying Jul contract settles at 7.00 on expiration 16 days from now on 25-Jun
- unlimited, dollar-for-dollar upside hedge protection above its 7.27 upside breakeven point at expiration.
In the Dec contract, last Thur’s 5.58 corrective low remains intact as the minimum level this market needs to fail below to expose the recovery from 26-May’s 5.00 low as a possible 3-wave and thus corrective event that may satisfy the third of our three reversal requirements. Similarly, continued strength above 07-May’s 6.38 high mitigates any peak/reversal count, reinstates the secular bull and exposes further and possibly extended gains thereafter.
This said, the market’s proximity to the extreme upper recesses of the past month’s range and resistance is hard to ignore as a favorable risk/reward hedging opportunity from the bear side.
BEAR-HEDGE: JUL SHORT-DATED 6.10 / 5.90 PUT BACKSPREAD
Similarly but inverted to the call backspread above for end-users, this put backspread is predicated on the Dec contract “moving sharply away from” current 6.00-area prices as a result of tomorrow’s crop report. This is why the maximum risk/cost occurs if the underlying Dec contract settles at 5.90 on 25-Jun and has fixed, negligible risk of 3-3/4-cents if the secular bull takes off again. This strategy involves selling 1-unit of the Jul short-dated 6.10 puts for around 22-3/4-cents and buying 2-units of the Jul short-dated 5.90 puts around 13-1/4-cents for a net cost of around 3-3/4-cents. This strategy provides:
- a current net delta of -22%
- favorable margins
- maximum risk/cost of 3-3/4-cents on ANY sustain rally above 6.10
- maximum risk/cost of 23-3/4-cents if the underlying Dec contract settles at 5.90 at expiration on 25-Jun
- virtually unlimited, dollar-for-dollar downside hedge protection below its 5.66 breakeven point at expiration.
Please contact your RJO representative for updated bid/offer quotes on these strategies and good luck on tomorrow’s numbers.