Market bottom may be near, trader says
Is the end near? There is evidence that an agricultural market bottom is close. This is strictly dependent on outside markets stabilizing, to a point.
Agriculture markets are working to divorce from negative macro momentum with fundamentals actually growing more important heading into N. American harvest and S. American planting.
First, we have bean and corn spreads tightening with domestic basis moving higher in nearby months, as farmers hold onto old crop while concentrating on harvest. Current prices are keeping farmers on the sideline with thoughts of better value in the near future. A post harvest rally is all but certain, with the world demand sure to come in mass, taking advantage of drastically low prices and an expected weak basis following hefty production expectations.
Second, we have eliminated any incentive for S. America to plant corn or beans for that matter. Corn will suffer worse due to higher input costs and poor early growing conditions in Argentina and Paraguay.
Third, we are currently sitting on no significant longs in the market to further add liquidation pressure. Commercials are locking in upside protection not wanting to miss current prices creating a dramatic shift in ownership. Corn OI is back under 1.0 million, soybeans are at 355K losing almost 10K on Friday. Wheat OI at 288K was least affected on Friday with this market suffering from the most dramatic previous losses.
Fourth, technicals remain oversold with all indicators sitting in the bottom end of the traded range with no immediate resistance above in any major market.
All these factors support a rally, returning from parabolically oversold conditions. To take advantage of this situation, commercial entities need to look at selling front end puts to finance Dec '09 and Nov '09 upside protection. The market may fall lower but front end put volatility should be near a top.
A good value sale to buy is deferred upside insurance. Speculators should look at CH and SH upside calls to gain a bit more time value with extended upside reach in November and December contracts not advised. Look for cheap plays here building your long delta position slowly. Remain bull spread concerning CZ and SX with basis on your side. Established risk is a great thing in these markets. Any upside move will only gain momentum from a macro rally.
With OPEC looking to stem production, crude is feeling a bit oversold. Crude remains overvalued fundamentally but technicals are a major factor in that market and they are way oversold lending credence to any corrective rally.
Overall, agricultural markets are poised for a rally but they still need help. We remain a reactionary market, not a trend setter. This was obvious on Friday. I've been bullish with established risk for quite a while throwing money into long positions that have yet to work out. My only saving grace was not financing this with short positions.
Those that have been on the sideline itâ€™s time to start looking at cheap upside speculative positions with calls and call spreads great plays, following recent events.