As mentioned in Thursday's Early Word Grains, soybean basis is in its higgledy-piggledy seasonal phase where different cash merchandiser bid off three different contracts. A few are clinging to the August, some have rolled their positions to the mostly irrelevant September, while others are moving their positions out to the new-crop November. Of the three, the latter provides the most thrills with the November now reflecting both old-crop and new-crop issues.
Given that one of the keys to any market is its basis (price difference between the cash market and futures market), and soybean basis can be easily skewed at this time, the next best alternative to understanding real market fundamentals (not the one's released by USDA each month) is by studying futures spreads. As most of you know, futures spreads are the price differences between futures contracts, and remains a key defense of commercial traders against moves by the noncommercial side of the market.
In the case of soybeans, notice that the four new-crop soybean futures spreads are all indicating a move to uptrends. Led by the November 2014 to January 2015 spread (red line), the long-term commercial outlook toward soybean supply and demand appears to be growing more bullish. This is somewhat of a surprising development IF one believes recently released supply and demand figures from USDA.
For example, the government was able to increase old-crop ending stocks by taking residual use to (-69) mb, a move that is expected to precede an increase in 2013 production. The ripple effect of the higher 2013-2014 ending stocks is that it becomes 2014-2015 beginning stocks, resulting in larger total supplies and theoretically more ending stocks.
But look again at the trend of the November to January futures spread. After posting a low weekly close of a 9-cent carry (week of July 7, or the week of the last USDA report), the spread has seen its carry trimmed to 6 1/2 cents through activity this week. Important resistance on this weekly close chart is at the 6-cent carry level (close from the week of June 23). A weekly close with a carry less than 6 cents would indicate this move is more than just a rally off the recent low and that an uptrend has been established.
What is supporting the commercial side of the soybean market? Since the November is now playing the dual role of old-crop and new-crop, the answer is also two-fold. First, the rally (weakening carry) in the November to January futures spread reflects the ongoing tight old-crop supply situation as the 2013-2014 marketing year comes to an end in the face of continued strong demand. But with similar moves seen in the January to March (black line), March to May (blue line), and May to July (green line) spreads there is also indications that the market is not convinced of USDA's cumbersome ending stocks estimate of 415 mb and ending stocks to use figure of 11.7%.
Again, the normal progression for changes in trend starts with basis, then futures spreads, and finally the futures market. With soybean basis hard to read at this time, indications of a change in price direction over time (trend) by soybean spreads could ultimately lead to a trend change in the futures market.
Natural gas, also known as the Widow Maker, seldom fails to make things interesting. This month has seen the market that often marches to the beat of its own drum, consistently work lower. So much so that the spot-month contract now appears to be targeting major (long-term) support on its monthly chart between $3.656 and $3.431. These prices mark the 61.8% and 67% retracement levels of its previous rally from $1.902 (April 2012) through its high of $6.493 (February 2014).
There are a couple of interesting things to point out about this previous move. Note that the April 2012 spike low occurred the month before a bullish crossover by monthly stochastics (bottom chart, green dot). The key to this is that the bullish crossover occurred below the oversold level of 20%, indicating a move to major uptrend.
The next month, June 2012, saw the spot-month contract post a bullish outside month (trading outside the May 2012 range before closing higher), confirming the uptrend. From there the market consistently worked higher before spiking to its February 2014 peak.
The question is now, has the trend turned down? Strictly from a technical point of view, the answer is no. Yes, I know, the market has fallen from its $6.493 high to this month's low of $3.755, but the technical signals are not there to suggest a possible downtrend returning the market to its previous low.
Take a close look at monthly stochastics as the market approached its peak. Notice that there appears to be a crossover above the 80% level back in May 2013. In reality though the faster moving blue line crossed below the slower moving red line the following month, June 2013, but below the overbought level of 80%. This kept the major uptrend in place.
How did the market respond? A look at the chart shows that after a period of consolidation near $3.43 it found the strength again to extend its uptrend to its February 2014 high.
But even then, monthly stochastics could not approach the 80% level. Therefore, much like the Korean War that never officially ended, the major trend in natural gas remains up. And that being the case, the spot-month contract should find renewed buying interest at the previously mentioned price range between $3.656 and $3.431.
When should this low occur? Seasonally natural gas tends to post its low in late August, so it seems logical the market could take the next three to five weeks to establish a low for this move. Once the market makes its bullish turn, resistance would be the pocket of trade between roughly $4.20 (low from April 2014) and $4.90 (just above the high from June 2014). This range could be pinned down a bit once the low for the sell-off is established.
Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.
As always, the true measure of the strength of weakness of any market is its intrinsic value. And in the case of grains, that means the cash markets need to be watched closely as they can sometimes disagree with what is going on in the futures market. However, both seem to be in agreement at this point: Corn is struggling to find buyers.
One of the studies I like to use in my analysis really isn't technical at all, but my version of simple economics. Based on the idea that demand picks up when prices are low and slows down when prices are high, I've always used a general distribution chart based on weekly closes for the various markets. This chart tells met the percentage of time the market posts a weekly close above its current price.
Let's take another look at the DTN National Corn Index (NCI.X). The NCI.X is the national average cash price created by DTN collecting cash bid data from almost 3,000 locations across the U.S. When last Friday's information was gathered and calculated, the NCI.X came in at approximately (rounded) $3.52. This is the lowest weekly close for the NCI.X since the week of July 12, 2010.
But we all know the corn market, both cash and futures, has been trending down. I'm curious about how Friday's NCI.X relates over time. To that end, I have a number of distribution tables covering 5 years, 10 years, from the beginning of the demand market at the start of the 2005-2006 marketing year, and dating back to the opening of the 2003-2004 marketing year (when domestic demand first climbed above the 10 million bushel mark).
For this blog, as well as the one posted on July 7, I'll focus on the demand market study. On the chart, last Friday's NCI.X of $3.52 (blue column) shows that roughly 66% of the time weekly closes are higher than the current price. The 50% mark is at $4.10. However, the column that may have everyone's attention is the red one off to the left. This roughly reflects government loan price near $2.00, a level that the market has closed below 8% of the time since September 2005. It is interesting to note that the NCI.X has not posted a weekly close below the $2.00 mark since late March 2006, just as the Renewable Fuels Standards put in place by the Energy Policy Act of 2005 were starting to kick in.
The question is now, given the downtrend in the futures market that is showing no signs of slow (next major support on the long-term monthly chart is between $3.45 and $3.25), how close to loan might cash prices actually get?
If we look at the cash bid map on DTN, and trace our finger out to the western part of the Northern Plains, we see cash prices already in the low $2.00 range. If the sell-off seen early Monday holds through the close, and basis (difference between cash and futures) doesn't change, at least one cash bid could dip below the $2.00 mark with others close on its heels. If we look at DTN's Regional Index for North Dakota and Minnesota it shows an average cash price of $2.79.
Is there hope for cash corn? Again, based on the idea that low prices create increased demand one would think so. However, with projections calling for record U.S. production and reduced domestic demand (a dubious projection, in my opinion), buyers may be content to sit tight to see how far into this distribution range the NCI.X could fall before they step in.
Corn: The DTN National Corn Index (NCI.X, national average cash price) closed at $3.51, down 9.00cts for the week. This is the lowest weekly close for the NCI.X since the week of July 26, 2010. National average basis (NCI.X - September futures) was calculated at 20cts under Friday evening, continuing to run below the 5-year average and 2 cents weaker for the week. The combination of weak national average basis while the futures market trades in the lower 17% of the 5-year price distribution range reflects a continued bearish old-crop supply and demand situation. Technically the NCI.X is nearing old support between $3.50 and $3.10 set from February 2010 through July 2010.
New-crop Corn: The December contract closed 6.25cts lower. The secondary (intermediate-term) trend remains down. Friday saw the contract close near its new low of $3.78, with weekly stochastics deep in single digits indicating a sharply oversold situation. The close of $3.78 1/2 has the December contract priced in the lower 17% of the market's 5-year distribution range. Friday's weekly CFTC Commitments of Traders report showed noncommercial traders trimming another 19,970 contracts from their net-long holdings. The December to July forward curve shows a bearish level of carry (67% of total cost of carry) reflecting an increasingly bearish view of supply and demand. Major (long-term) support in the futures market is between $3.45 and $3.25.
Soybeans: The DTN National Soybean Index (NSI.X, national average cash price) closed at $12.05, down $0.23 for the week. The NSI.X posted its lowest weekly close since the week of February 6, 2012 and priced in the lower 36% of the 5-year distribution range. National average basis weakened by about 5 cents last week, though results could start to be skewed by the rolling of bids from the August contract to the November. The cash market is oversold technically meaning it could soon find renewed buying interest.
New-crop Soybeans: The November contract closed 10.25cts higher. Despite the higher weekly close the secondary (intermediate-term) trend remains down. However, the November stabilized above its recent low of $10.65 while weekly stochastics continue to move toward the oversold level of 20%. Friday's close of $10.85 1/4 put the November contract in the lower 23% of the market's 5-year price distribution range. The forward curve (November 2014 through July 2015 contracts) remains neutral at approximately 50% of total cost of carry. Major (long-term) support on the continuous monthly chart is between $9.91 1/2 and $9.28 1/4, the 61.8% and 67% retracement levels of the previous major uptrend from $4.98 1/s through the high of $17.89.
Wheat: The DTN National SRW Wheat Index (SR.X, national average cash price) closed at $5.02, up 1.00ct for the week. Despite the higher close the SR.X remains in a price level not seen since the week of July 6, 2010. National average basis was calculated at 30 cents under Friday, just below the strongest basis has been the last five years at 24 cents under. However, the 30 cents under was 5 cents weaker than the previous Friday's settlement.
SRW Wheat: The September contract closed 6.25cts higher. The secondary (intermediate-term) trend remains down, though could turn sideways if the contract is able to hold above last week's low of $5.24 1/4. Weekly stochastics are deep into single digits indicating a sharply oversold market, while the September contracts weekly close of $5.32 1/4 puts it in the lower 18% of the market's 5-year price distribution range. However, noncommercial traders continue to add to their net-short futures position with Friday's Commitments of Traders report showing an increase of 3,054 contracts. Major (long-term) support on the continuous monthly chart is at the June 2010 low of $4.25 1/2.
The most recent CFTC Commitments of Traders report was for positions held as of Tuesday, July 15.
Brent Crude Oil: The spot-month contract closed $0.58 higher. The secondary (intermediate-term) trend is sideways to down. The spot-month contract rallied off its test of support at $104.62, a price that marks the 61.8% retracement level of the uptrend from $96.75 through the high of $117.34. Resistance is pegged between $108.15 and $110.05.
Crude Oil: The spot-month contract closed $2.30 higher. The secondary (intermediate-term) trend on the weekly chart is sideways. The spot-month contract rallied off its test of support at $99.48, a price that marks the 50% retracement level of the uptrend from $91.24 through the high of $107.73. Resistance remains be $104.22 and $105.25, the 61.8% and 67% retracement levels of the downtrend from $112.24 through the $91.24 low.
Distillates: The spot-month contract closed 1.57cts lower. The secondary (intermediate-term) trend remains sideways to down. The spot-month contract is testing support at $2.8285, the low from the week of November 4, 2013.
Gasoline: The spot-month contract closed 4.82cts lower. The secondary (intermediate-term) trend is sideways to down. The spot-month contract closed below support at $2.9008, a price that marks the 38.2% retracement level of the previous uptrend from $2.4945 through the high of $3.1520. This sets the stage for a test of the 50% retracement level at $2.8322.
Natural Gas: The spot-month contract closed 19.5cts lower. The secondary (intermediate-term) trend remains down. The spot-month contract is trading well below support at $4.249, a price that marks the 67% retracement level of the previous uptrend from $3.129 through the high of $6.493. Major (long-term) support is between $3.656 and $3.431.
As hard as it is to believe, at different times this past week it seemed like the September Chicago wheat contract wanted to establish an uptrend. I know, in my latest On the Market column I dismissed wheat's chances of turn bullish rather easily, with the lone bullish factor in the market's bearish haystack being the fact it is technically oversold. But perhaps in its weakness lies its inherent strength.
Or something like that. It is far too late on a Friday afternoon to be philosophical.
It doesn't take much to see that September Chicago's weekly stochastics (second chart) are about as close to 0% as can be, with the faster moving blue line finishing the week at 3.8% and the slower moving red line at 5.7%. Like a putt hanging on the lip of the cup and not falling, it wouldn’t have taken much of a rally for weekly stochastics to establish a bullish crossover.
But it wasn't to be. Instead of holding steady near Thursday's solid close the contract (heck the wheat market in general) fell hard Friday as the idea of a downed Malaysia Airlines plane in Ukraine leading to increased demand for U.S. supplies fizzled. This allowed the September contract to fall back to near its low of $5.24 1/4 posted earlier in the week.
Pressure continues to come from both sides of the market. Commercial selling is indicated by the strengthening carry in the September to December futures spread (third chart). The 24 cents the spread showed at Friday's close is the strongest the carry has been since it became relevant, meaning the commercial view of supply and demand continues to grow more bearish.
The other side of the market, the noncommercial side (blue histogram, bottom chart), also sold this last week. Friday's CFTC Commitments of Traders report (positions as of Tuesday, July 15) showed this group increasing their net-short futures position by 3,054 contracts to 43,704 contracts. This is the largest net-short position (by noncommercial traders) since the week of February 3, 2014.
Where to now for Chicago wheat? For that we need to turn to its long-term monthly chart. The nearby September contract is in the middle of an old block of trading between $5.85 and $4.25 established between September 2009 and June 2010. Meanwhile, monthly stochastics are approaching the oversold level of 20%. Unlike the weekly study, the long-term momentum indicator already established a bullish crossover (faster moving blue line crossing above the slower moving red line below the 20% level) at the end of February 2014. Therefore, this sell-off doesn't need to dip back below 20% before a confirming crossover is seen.
Given that the September contract is priced in the lower 18% of the market's 5-year distribution range, a round of noncommercial short-covering buying could occur at any time. However, until the commercial side starts to grow more bullish potential rallies should be limited.
Soybeans have entered that odd time of year when the November contract plays the dual role of covering both old-crop and new-crop activity. Dwindling open interest in the August and a general lack of enthusiasm for the September puts more old-crop commercial attention on the November contract over the last 6 weeks of the marketing year.
Despite continued bearish weather forecasts (conditions generally viewed as favorable for the growing crop) the November contract has rallied off last week's low of $10.65. Much of the support has come from the commercial side of the market, indicated by the weakening carry in the November to January futures spread (second chart, green line).
Why the renewed commercial buying interest? First, the tight old-crop supply and demand situation was not solved by USDA taking residual use to (-69) mb in its latest supply and demand report. While it makes the columns on paper come out even, finding those additional 70 mb could prove to be difficult. This sets the stage for the carry in the November to January futures spread to possibly be whittled back to its previous peak of 6 cents (week of June 23).
Also, new-crop soybean export sales continue at a brisk pace with another 26 mb (708,000 mb) announced early Thursday morning. Questionable beginning stocks combined with still strong pre-marketing year demand could offset some of the bearishness tied to continued projections of record crop production.
As for price potential, the November contract has a window of opportunity between the July and August USDA reports to go up and close its bearish gap (top chart, red circle) left at the beginning of last week. Notice that the high side of the gap ($11.32, the low from the week of June 30) is near resistance at $11.36 1/4, a price that marks the 33% retracement level of the sell-off from $12.79 through last week's low.
With the existing carry in the November to January spread of 8 1/4 cents representing a neutral to bearish level of total cost of carry (approximately 53%), this short-term rally could be checked by the 33% retracement level with only an outside chance of extending to the 50% retracement level of $11.72.
Finally, weekly stochastics (third chart) remain bearish. While not trumping a possible commercial led rally, this technical momentum study needs to see a bullish crossover below the oversold level of 20% to confirm a move to a secondary (intermediate-term) uptrend by the November contract.
Let me begin by saying the historic rally in the livestock sector, led in large part by the live cattle market, has been driven by fundamentals. Tight supplies and continued strong demand have created the situation where the cash markets in live and feeder cattle continue to run well above the sky high futures price. And as most of you know, there is no one better when it comes to analyzing and writing about the livestock markets than DTN's own John Harrington. His "Harrington's Sort and Cull" blog and "The Market's Fine Print" bi-weekly column are must reads, not just for those in the livestock industry, but for anyone look for insightful and entertaining information.
Now for my point of view. As you know, this blog takes a look at the technical, or chart-based, side of the markets. The past months have seen me post a number of discussions on various livestock charts, usually with the bottom line of not wanting to be the first to step in front of the runaway train that has been the livestock sector.
This one could be more of the same, or entirely different. I'm not quite sure yet.
A look at the attached weekly chart for the October live cattle contract shows a market that has been in a strong uptrend, until last week. After posting a new high of $158.00 the contract fell below the previous week's low of $152.60 before closing well below that mark at $151.65. Those familiar with this blog will recognize that technical pattern as a key bearish reversal, normally associated with a turn in the market from an uptrend to a downtrend.
The problem is we've seen this same pattern in the past, most recently the week of May 19. As is easily visible on the chart, the market hardly hesitated before rallying from that week's close of $141.50 through last week's high, a gain of $16.50. But a closer look at a variety of technical studies shows what could be the difference this time around.
Weekly stochastics (second chart) have been running above the overbought level of 80% for the most part since the beginning of 2014. Over the course of the year there have been a number of instances of what look to be bearish crossovers (the faster moving blue line crossing below the slower moving red line), though none of them were in conjunction with a bearish signal on the weekly charts. Again until last week.
As the October contract finished off its key bearish with Friday's lower weekly close, stochastics posted a corresponding bearish crossover that included the important component of occurring above the oversold level of 20%. If we go back to the same technical patter from the week of May 19, we see the crossover by weekly stochastics was done with the faster moving blue line at 76.8%, slightly below the 80% level. This slight difference could be the fine line between what was resulted in a continuation of the uptrend and what might be the move to a secondary (intermediate-term) downtrend.
As stated above, the underlying fundamentals of live cattle seem to be bullish, as indicated by the still strong basis (difference between cash and futures prices). However, if we look at the October to December futures spread (third chart, green line) we see what appears to be the early stages of a downtrend developing. Based on weekly closes, the spread has pulled back from its high of $0.85 (week of June 30) to last week's settlement of (-$1.35). While this week has seen a small uptick (-$0.95), it is important to see what the next move is. A weekly close below last week's settlement would signal a strengthening downtrend (more bearish commercial view of the market) while continued support in the October contract (in relation to the December) could result in a test of the recent high.
Noncommercial activity is also a concern. Market volatility has steadily climbed to its current reading of 11.6%. As a general rule, large noncommercial traders don't like increased market volatility as it increases their risk exposure. Therefore, higher volatility readings tend to lead to noncommercial long-liquidation that ultimately drives the futures market down.
The most recent weekly CFTC Commitments of Traders report (positions as of Tuesday, July 8) showed noncommercial interests holding long futures of 151,855 contracts. While still substantial, and dangerous to a market threatening a bearish turn, it is down from its peak of 176,350 contracts from the week of March 31, 2014.
Cotton has been under pressure for what seems like forever, but in reality has only been since it established a double-top on its weekly close only chart in early May. Compared to its 5-year seasonal index (not shown) this was later than normal. From there the market has closed lower 10 consecutive weeks, quite a run as cotton raced to get back in step with its seasonal index.
But catch up it did, so much so that last week's close of 68.12 (December contract) may actually be right In step with the seasonal low weekly close the second week of July. As the index indicates, the market tends to trend sideways the next two weeks before rallying through its seasonal high weekly close late next February.
What is a seasonal index? In this case it is a study that takes weekly closes over the course of a calendar year, averages each weekly close, then averages all 52 weekly averages, before finally diving the weekly averages by the yearly average. This provides a week by week percentage, marked on the left hand axis of the chart. I then plot the current year's (calendar or marketing) along with the seasonal index for a comparison.
In the case of cotton, the market has generally followed its seasonal patterns if we keep in mind that the index is based on a series of averages. For example, the normal downtrend from the February high through the July low averages 25%. In 2014, last week's close of 68.12 was 72% of the close the first week of May at 94.32 for a decrease of 28%.
If the cotton market is seasonally set to turn bullish, what factors will lead the way? First and foremost is that last week's close by the December contract has the market priced in the lower 7% of cotton's 5-year price distribution range. Based on simple supply and demand rules; low prices tend to create increased demand, be it commercial demand for the actual physical commodity or imaginary demand for paper futures market holdings.
In cotton's case, renewed commercial demand may be slowly building, as indicated by the stabilizing of the trend in the December to March futures spread (bottom study, green line). Just a reminder, futures spreads (the price differences between contracts) reflect the commercial outlook of a markets real supply and demand situation, an outlook that often differs from USDA's report conclusions.
As for noncommercial interest, last Friday's CFTC Commitments of Traders report (third chart, blue histogram) showed this group continuing to decrease their net-long futures holdings (as of Tuesday, July 8) by reducing their long position by 3,303 contracts and adding 3,665 contracts to their short position. The resulting net-long of 5,167 contracts is the smallest is the smallest this position has been since the 4,546 contracts reported the week of November 17, 2013.
Weekly stochastics (second chart) have historically been a good indicator of market turns in cotton. Heading into this week's action, weekly stochastics for the December contract are in single digits, confirming the idea the market is sharply oversold, and could see a bullish crossover (faster moving blue line crossing above the slower moving red line, with both below 20%) if the contract does move sideways over the next couple of weeks. When was the last time a bullish crossover occurred? The week of November 24, 2013, one week after noncommercial traders had pushed their net-long position to a multi-year low.
Corn: The DTN National Corn Index (NCI.X, national average cash price) closed at $3.60, down 31.00cts for the week. This is the lowest weekly close for the NCI.X since $3.74 the week of August 23, 2010. National average basis (NCI.X - September futures) was calculated at 18cts under Friday evening, continuing to run below the 5-year average of 15cts over. The combination of weak national average basis while the futures market trades in the lower 17% of the 5-year price distribution range reflects a continued bearish old-crop supply and demand situation. Technically the NCI.X is in a pocket of old support between $3.10 and $3.80 set from July 2009 through August 2010.
New-crop Corn: The December contract closed 30.50cts lower. The secondary (intermediate-term) trend is down. The contract posted a new low of $3.82 1/2 before closing for the week near that low at $3.84 3/4. This price puts the December contract in the lower 17% of the market's 5-year price distribution range. Weekly stochastics are in single digits, well below the oversold level of 20%, though this has not sparked buying interest. The new-crop forward curve (December 2014 through July 2015 contract) continues to show a neutral to bearish level of carry. Major (long-term) support in the corn market is $3.24 1/2, the low from June 2010.
Soybeans: The DTN National Soybean Index (NSI.X, national average cash price) closed at $12.28, down $1.03 for the week. The NSI.X is set to test its previous low of $12.15 set the week of November 4, 2013, Last week's close put the NSI.X in the lower 38% of the 5-year price distribution range. National average basis (NSI.X - August futures contract) was calculated at 33cts under Friday evening, well below the 5-year average of 10cts under and implying that concern over tight supplies to meet demand could be waning. Next major (long-term) support below that near $11.16, a price that marks the 50% retracement level of the uptrend from $4.85 (February 2005 low) through $17.48 (August 2012 high).
New-crop Soybeans: The November contract closed 58.50cts lower. The secondary (intermediate-term) trend remains down as the November moved to a new low of $10.65. Weekly stochastics are approaching the oversold level of 20%, leaving the door open for continued pressure in the market. The forward curve (November 2014 through July 2015 contracts) remains neutral, though the strengthening carry is reflecting an increasingly bearish view of long-term supply and demand.
Wheat: The DTN National SRW Wheat Index (SR.X, national average cash price) closed at $5.01, down 21cts for the week. The last time the SR.X posted a weekly close below $5.00 was the week of July 6, 2010 when it was calculated at $4.90. National average basis (SR.X - September Chicago futures) was calculated at 25cts under Friday evening, holding near the 5-year high for last week at 23cts under. A firm basis isn't surprising given that the September Chicago futures contract is trading in the lower 17% of the market's 5-year price distribution range. Next major (long-term) support for the SR.X is between $4.75 and $3.75, a range established from January 2010 through July 2010.
SRW Wheat: The September contract closed 53.50cts lower. The secondary (intermediate-term) trend remains down as the contract posted a new low of $5.25, closing near that low at $5.26. Weekly stochastics are in single digits, continuing to indicate the market is sharply oversold. The September Chicago is now priced in the lower 17% of the market's 5-year price distribution range. A pocket of major (long-term) price support is between $5.83 1/2 (high from November 2009) and $4.25 1/4 (low from September 2009).
Brent Crude Oil: The spot-month contract closed $3.98 lower. The secondary (intermediate-term) trend is down. The spot-month contract is below short-term support at $107.84 and could now target longer-term support at $104.62. This price marks the 61.8% retracement level of the previous uptrend from $96.75 through the high of $117.34. The spot futures spread continues to show a strengthening contango reflecting a more bearish view of supply and demand.
Crude Oil: The spot-month contract closed $3.23 lower. The secondary (intermediate-term) trend on the weekly chart is sideways to down. The spot-month contract is between support at $101.43 and $99.48, prices that marks the 38.2% and 50% retracement levels of the previous rally from $91.24 through the recent high of $107.73. Weekly stochastics are neutral to bearish. The market's forward curve continues to show a weakening backwardation reflecting a less bullish view of supply and demand.
Distillates: The spot-month contract closed 6.75cts lower. The secondary (intermediate-term) trend is sideways to down. The spot-month contract is testing its previous low of $2.8455 while weekly stochastics remain neutral to bearish. The contango in the forward curve continues to strengthen, indicating a more bearish view of supply and demand.
Gasoline: The spot-month contract closed 11.13cts lower. The secondary (intermediate-term) trend is sideways to down. The spot-month contract is testing support at $2.9008, a price that marks the 38.2% retracement level of the previous uptrend from $2.4945 through the high of $3.1520. Weekly stochastics are now bearish. The 50% retracement level is down at $2.8322.
Natural Gas: The spot-month contract closed 26.0cts lower. The secondary (intermediate-term) trend is now down with the spot-month contract trading below support at $4.249. This price marks the 67% retracement level of the previous uptrend from $3.129 through the high of $6.493. Next support could be found near the 2004 low of $3.953.
"Bearish". That word has been tagged to almost every piece of corn analysis, be it fundamental or technical, dating back to early April. However, as we wait for yet another round of USDA numbers, which of course are expected to be bearish (naturally), I'm going to make the argument as to why the corn market could close higher Friday.
One number, just one, could change the outcome for corn: National average yield. As discussed in the report preview ("Extreme Reports") the pre-report average estimate came in at 166.8 bushels per acre, up from USDA's June projection of 165.3 bpa. However, if we consider a couple of factors, USDA may be more inclined to leave the yield number unchanged for now.
Frist, USDA has no reason to raise its national average yield estimate. The August report is its first release of official survey results, so the government could simply stand pat on its projection, being able to pin a possible bearish reaction in August to the survey component.
But what about the incredibly high NASS weekly crop condition ratings that are far higher than the record yield year of 2009? That's simple - USDA's yield projections are not influenced by NASS' weekly numbers. I know, it sounds silly to me too, but that's how the system works. So if USDA doesn't have an official survey of yield potential, and it can disregard early season record high crop condition ratings, it is highly likely that it decides there is no good outcome for itself by raising national average yield in July.
So, if yield stays at 165.3 bpa, and USDA does incorporate its new harvested acreage estimate of 83.8 million acres from the June 30 report, total production would fall from the June (and May) projection of 13.935 bb to "only" 13,852. And if every other supply and demand number remains the same, then new-crop ending stocks would dip to 1.643 bb, roughly 130 mb below the pre-report average estimate.
This being a blog that looks at the technical side of the market we now have to ask if the charts would agree with a bullish interpretation of Friday's reports. Those that have been following the weekly analysis (usually posted on Sunday mornings) will recall two phrases: Corn is in a downtrend; and, Weekly stochastics continue to show the market is oversold. While both remain true, it is the latter that could possibly lead to a change in the former.
Generally speaking, a downtrend in a commodity market is tied to increased noncommercial selling; be it long-liquidation or the addition of new short positions. Since early April, pressure in the corn has been tied in large part to the increase of short positions by noncommercial traders leading to a reduction in their net-long futures holdings.
Why is this distinction important? As stated above the corn market is sharply oversold, with the December contract's weekly stochastics (bottom chart) not only below the 20% but in single digits. In addition to that, the September contract is trading in the lower 17% of the 5-year price distribution range while the December contract is priced in the lower 19%. The DTN National Corn Index (national average cash price) was calculated at $3.69 Thursday evening, put the cash price in the lower 29% of its 5-year distribution range, but more importantly near the lower 40% of the range established since the beginning of corn's demand market at the start of the 2005-2006 marketing year.
It should be noted that the December to March futures spread (second chart, green line) has seen an ever so slight weakening of its carry this week to 10 3/4 cents. While still a neutral to bearish level of full commercial carry (total cost of holding corn in commercial storage), it does indicate that commercial buying has emerged with the cash and futures market priced this low.
Last but certainly not least, the market volatility (third chart, red line) of the December contract has climbed to near 20%, its highest level since September 2013.
Let's put the pieces together now: USDA could see no reason to increase yield, therefore lowering its production estimate; corn prices (both cash and futures) are at levels that have historically sparked increased buying interest, the December to March futures spread is showing light commercial buying interest, market volatility is as high as its been in almost a year, and noncommercial traders are holding their largest short futures position (last reported at 293,291 contracts) since this past February.
This combination could lead to a round of noncommercial short-covering (buying) after the release of the report, resulting in a higher close Friday and maybe, just maybe, the start of a short-lived uptrend until the August report, with its survey results, rolls around.
A long-time veteran of the hog industry sent me an email recently. This gentleman, if I recall correctly, runs a processing plant on the East Coast (though don't hold me to that, it has been years since I last visited with him). Anyway, he asked if I still had my chart mapping the 3 to 4 year, 6-point cycle in hog prices (monthly futures price closes only), wondering if he would see the next cycle bottom before he died.
That sent me on a quest to find the chart, update it, and get it posted again on DTN (the last time was back in 2006 or 2007, I think). Now, many of you don't know what that entails. My computer being a Dell, I naturally have a version of Windows Excel. In this program there are, by rough estimation, literally thousands of charts that I've created since joining DTN back in January 2004. Many of the workbooks in the program are creatively labeled "Book 1" or whatever count the computer is up to, with pages in those workbooks often titled "Chart 1" through "Chart 20", or "Sheet 1" through "Sheet 6". Those I work with in the analysts' corner of the newsroom just shake their head at the disorganization of the filing system.
Given that system, finding a specific chart from nearly a decade ago is like finding the Ark of the Covenant after it was stored in the labyrinth of the government warehouse at the end of the first (and in my opinion best) Indiana Jones movie.
But find it I did. Oddly enough, a simply search of the phrase "Hog Cycle" quickly located the missing file. Who would have bet that I had actually given it a correct title?
With that back story out of the way (and I appreciate you staying with me to this point), what about the analysis? Does the long-term cycle in hogs still hold true, or has it been blown up by recent years of increased volatility?
I started this study back in the early 1990's when as a broker I had a number of customers needing to hedge hogs (chuckle) as price risk management. After looking at the long-term monthly close chart (nearby futures) I noticed that the space between peaks (Point 1) and valleys (Point 4) seemed to be relatively evenly spaced for a volatile commodity market. Upon closer inspection I noticed that between each peak there were similar, but not identical, waves of highs and lows. As it turned out, each move consisted of six points where the market changed direction, before the beginning of the next cycle.
The attached chart comes from DTN ProphetX, showing monthly closes back to 2002. This replaces my original excel file that had become too condensed given the amount of data it had to show. This chart picks up at the midpoint of the April 2000 to October 2003 cycle, showing the low Point 4 that occurred in August 2002 at $30.875 (remember that?). The next cycle began (Red Point 1) with the high monthly close of $78.95 in June 2004.
Let's break the cycle down point by point:
Point 1 (the cycle high) tends to occur in the April-May-June quarter, with a 100% record over the last 8 cycles (including the one that looks to have started in June 2014, far right side of the chart, blue "1"). Analyzing the space between these eight "1"s shows a different cycle: two 36 month periods (approximately) followed by two cycles ranging from 47 months to 50 months. The recently completed cycle from "1" to "1" was 50 months, meaning the next cycle could be in the longer range.
Point 2 tends to occur in the August to October quarter, only once hitting in November (1993). If June 2014 is indeed this cycle's "1", point 2 could occur late this September.
Point 3 tends to occur the following April-May-June quarter, meaning hogs would be expected to post a secondary high in May 2015.
Point 4 is the wildcard, and also the cycle low. It is the point most responsible for the variability between 3 years and 4 years. The time from point 3 to point 4 can range from 5 months (2008) to 19 months (1994). Using the median average of the previous seven cycles, this time around point 4 could occur in August 2016.
Point 5 moves back to the April to June quarter, with this cycle projecting to land in May 2017.
Point 6 finishes off the cycle, with November 2017 as the target month. From there the next cycle would be expected to being in May 2018.
To my friend back east, thank you for the reminder to take another look at this chart. To everyone: It will be interesting to continue to watch how this plays out.
A price gap is defined as an area on a bar chart where no trade has occurred. If you look closely at the attached November soybean weekly chart, the red circle shows that such an area exists between last week's low of $11.32 and this past Monday's high of $11.29 1/2. The question market bulls and bears must now debate is what type of gap is it?
Gaps are classified into four different types.
The first, a common gap, is inconsequential and usually ignored by chart analysts due to their tendency to occur during low volume trade. Initial analysis would show this type to be a possibility as the contract's trade volume increased dramatically last week 491,077 contracts before dropping significantly early this week. Of course, the latter can be explained by another monthly USDA Crop Production report looming this coming Friday. Activity following the report should see a spike in volume, keeping the weekly level close to what was seen last week.
The second type of gap is a breakaway gap, usually occurring as one trend comes to an end another IS BEGINNING. I capitalize that last part, because market bulls will be hitting the bottle early this morning if the conclusion is the downtrend in November beans is just getting under way, $1.50 below the recent high of $12.79 (week of May 19).
The third type of gap, the runaway or measuring gap, is also frightening for market bulls as it would imply the downtrend is only at its midpoint. Measuring from the bearish breakout from the approximate triple-bottom near $12.01 to the top of the price gap ($11.32), and subtracting from the bottom of the gap ($11.29 1/2) creates a possible downside target near $10.60. A look at the long-term monthly shows this would put the market in a pocket of trade dating back to between December 2009 and April 2010.
If this week's pattern is the fourth type of gap, an exhaustion gap, it offers market bulls hope that the end of the sell-off is near. Exhaustion gaps, as their name suggests, come near the end of a price move as the last round of enthusiasm is exhausted. Exhaustion gaps also open the door for an interesting little pattern called an "Island Reversal", where a breakaway gap soon follows leaving the short-term price range surrounded on either side by space (water). If such a pattern emerges it would indicate the trend of the contract has turned up again.
But what are the other technical indicators saying about the market? First, the trend is decidedly down reflecting solid selling by the noncommercial side of the market. Recent weekly CFTC Commitments of Traders reports confirm this, with the noncommercial net-long futures position falling from 211,816 contracts (week of February 23, 2014) to this past week's low of 17,121 contracts.
Additional pressure has come from the commercial side of the market, as indicated by the downtrend in the November to January futures spread (second chart, green line). This downtrend reflects a strengthening carry in the spread, with Tuesday morning's 9 cents amounting to roughly 56% of full commercial carry (total cost to hold cash supplies in commercial storage). Keep in mind that my analysis breaks cost of carry into thirds, with 66% or higher considered bearish. Therefore, the 56% would be classified as a neutral to bearish indicator toward new-crop supply and demand.
Weekly stochastics (third chart) are approaching the oversold 20% level, but are not there yet. This would imply that the November contract has more room to the downside before this momentum indicator can create a bullish crossover (faster moving blue line crossing above the slower moving red line, with both below the 20% level).
Disregarding the question of price gap type, technical analysis would indicate that the November contract could see a full retracement back to its previous low of $10.88 1/4 (week of January 27, 2014). Market action the balance of this week could go a long way to determining what type of price gap was left Monday, with all four still possible.
As DTN Markets Editor Katie Micik wrote about last week, the DTN National Corn Index (NCI.X, national average cash price) closed below $4.00 for the first time (weekly close only) since the week of August 23, 2010. The difference is during that time, the cash corn market was beginning a strong uptrend, continuing its climb from the early December 2008 low of $2.69.
Those familiar with my analysis know that one of ways I measure a market's strength or weakness is by price distribution. This shows the percent of time a market (cash, futures contract, etc.) closes the week above a certain price level over a set period of time. In DTN Strategies, the charts are based on the last five years of the futures markets. But for this look at the NCI.X, I decided to use a different approach.
The attached chart takes a look at the cash corn market since the beginning of the demand market for corn at the start of the 2005-2006 marketing year (August 2005). Why this particular marketing year? The Energy Policy Act of 2005 included an increase in the use of biofuels, most notably starting in 2006. At the same time, Chicago exchange rules were changed to allow for more investment in ag commodities, most notably corn, starting in 2006 as well. The latter opened the door or large global investors looking to take part in the newly legislated demand for corn, setting in motion the changed dynamics the market is still driven by today.
If we look closely at the attached chart we see that the $1.50 column on the far right hand side extends all the way up to 100%. That means since the beginning of the 2005-2006 marketing year, the NCI.X has closed above $1.50 100% of the time. Analysis of the data shows this to be the case, with the low weekly close of $1.55 occurring the week of October 24, 2005. Far off to the right hand side we see the $8.00 mark is near 0%. The data shows that since August 2005, the NCI.X has closed above this price level twice out of 461 weeks. The high close was $8.17 the week of July 16, 2012.
With the NCI.X priced below $4.00 last week, just ahead of the July 4th holiday weekend, where does that put the cash market in the longer-term price distribution range? The red column represents the most recent weekly settlement, putting the NCI.X at the 54% mark, meaning more than half of the weekly closes since August 2005 have been above this price (the actual midpoint, the yellow column, is at $4.10).
So what does this mean for the corn market in general? Remember that the cash value of any market, including corn, is its intrinsic value. That being the case, cash corn could soon be viewed as undervalued. However, things might not get interesting until the NCI.X drops into the lower third of the price distribution range, with the 66% mark at $3.50.
Given that basis (the difference between the NCI.X and the futures market) has been running at roughly 18 cents under, just below the demand market average of 15 cents under for early July.
If basis holds near average through the first quarter of the 2014-2015 marketing year (September, October, November), roughly 33 cents under the futures market, and the NCI.X possibly finding renewed buying interest near $3.50, then the potential price target for the December 2014 futures contract would be between $3.80 and $3.90.