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May 12, 2015
The Chicago Wheat Market
aka, the New Pork Bellies?
Ready to Lift OFF?
No, nothing could ever match the old Pork Belly contract for volatility (and shenanigans) but Wheat does often make the same very sharp “V” market turns that Bellies used to be famous for…And due to the recent confluence of several very important factors, I think Wheat is extremely well primed for one of those big sharp upturns…literally, ANY DAY NOW.
Start with Commitments of Traders…Even though I frequently reference Commitments, I do not regard them as a perfect timing tool. In fact, overwhelming imbalances between Commercials and Speculative Traders can exist for long periods of time…BUT…sooner or later, my observation is the Specs DO eventually get it handed to them…and the reversals resulting from those situations where the Funds (who are not the professional geniuses you might suppose) are heavily on one side of the market are frequently quite big, fast and relatively non-stop once that reverse button is finally activated.
I would also add that I consider Commitments to be fairly worthless in a few markets (never figured out why), but in the same vein, there are a few of them in which I would almost say they work like clockwork…and Wheat is very definitely in that category. No, this is not to say, you “can’t go wrong”, but part of the whole trading process IS making guesses and looking for clues that help you determine what you think will happen…or CAN happen…and Commitments DO, in my opinion, have a better than decent track record in helping predict reversals in the Wheat market…So here’s a bit of research to substantiate what I mean…
There have been 5 periods since 2005 when the funds (in green) have been heavily short wheat…and the result was eventually the same in all 5 cases…
To reiterate, these circumstances where the Commercials and the Funds are positioned heavily opposite each other can exist for months on end…but sooner or later, over and over, they DO flip sides…and usually in pretty stout fashion…
In fact, here are the respective moves (and prices changes) that actually took place in the individual futures contracts noted in those 5 situations noted above. Match up 1 thru 5 from the Commitments chart with each of the 5 charts that follow…
And you can be assured…and I will swear by it because I have NEVER seen it any different…In general, there was not a bullish voice to be found anywhere at ANY of those five bottoms…In every case, the “fundamentals and technicals” were “nothing but bearish”…and you’d better believe that is exactly the case again now. Seemingly, the whole commodity world is bearish this market.
In the past, I have also observed that it is not uncommon for a bearish move to be pretty much played out…moving down in relatively smaller and smaller increments…but the funds keep getting short in proportionately larger and larger numbers…such that, when the bear move DOES end, they have MUCH heavier shorts than they held in the middle of the move…thus potentially setting the stage for one of those old style, rip-roaring Pork Belly “V” type reversals…
So check this out…It looks like they are doing the same thing again…
Just to be clear, during the past 3 months, even though Wheat has slipped only slightly into new lows…when it has basically gone nowhere…during those three months, as the Commercials have been getting more and more long (these would be hedges against SALES ORDERS they have on their books), and now have a RECORD LONG POSITION, the Funds have been piling in more and more heavily on the short side…even though their gains can only be incremental at best…
Ever been there? Where you are so sure you’re right, even though the market is just barely going your way, but you keep getting a bigger and bigger position? Well, I have…it’s a recipe for disaster… and I cannot count the times I’ve seen the “pros” just get toasted in this business…And I absolutely see this as one more clue that Wheat IS primed for a dynamic upturn.
And finally, although it is just another indicator (none of which are infallible), here is a seasonal composite chart of Wheat which has been created by combining, and averaging, all the individual Wheat futures contracts going back for a period of 20 years. While no two years are ever the same in any market, and there is NOTHING that says a market is ever going to even come close to matching its month by month seasonal tendencies, I do take note that the current seasonal tendency is to be looking for a low at any time now…
And you’ve seen this before, but I think it is definitely worth another look...It has nothing to do with timing but I believe it does argue against ever getting TOO bearish on this market…which is where those funds seem to be right now?
Is this as simple as this looks? Absolutely not…It NEVER is…Sometimes you’re sitting around waiting and waiting and waiting…and what looks like a very short period of time on the charts (in retrospect) can FEEL much longer while you’re in it, and thinking, “WHEN is this going to get right? WHEN is it going to move?”. But a big part of trading is, firstly, recognizing what CAN be about to happen…which therefore necessitates being in a position BEFORE it DOES move…which does sometimes (or often) mean waiting…and maybe waiting some more.
So what I am doing now is establishing COMMITTED LONG POSITIONS using the September contract…I think this gives us plenty of time for something big to happen, and as always (AND FOREVER) I am using the 1 call & 1 put approach…IF Wheat continues to slide, the math says I have an excellent chance of recouping what I have spent on both options AND the opportunity to reposition (with the same money) at lower prices. I AM STAYING LONG THIS MARKET. ALL THINGS CONSIDERED, I LOOK FOR AT LEAST A $1.50 TO $2.00 RALLY BEFORE SEPTEMBER GOES OFF THE BOARD.
Here’s the long term look…
Here’s what you do right here….
Option prices include all fees and commissions.
I think this is about as smart as you can get. When you get down to it, all of this stuff is really just educated guesses and calculated risks…and then, more importantly than anything, knowing what happens when you are wrong…So I look at this idea, and all my reasons for being in the trade, and the first thing I think is, WON’T GO SIDEWAYS…Of course it can go nowhere, and like the chart points out, if we go off between 480 and 500, you lose everything…But then again, if 4 months from now this thing has been dead in the water, I’ll just say the probability of a big move has just gone up…tremendously…and 4 months of a dead market would most likely also mean option prices offer a LOT more leverage…and I’d be ready to DO IT AGAIN…and probably do it bigger.
And if it’s not done going down?...I look at the chart above, and what it would take on the downside to recoup 100% of what this position costs…and plain & simple…it looks like nothing…just a further blip on the downside…where I would be more than happy to take all the money, again, and then own something like the 450 calls. PERIOD.
On the upside? I wouldn’t be in this if I didn’t think it could do something BIG. Nothing more to say.
Call me if you’re interested. The 1 & 1 rules. Changing my life I think. Give me a call and hear more about how it IS changing the game around here.
For real guys…
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Wheat