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Soy Roy: Another Winning Spec Trade

04/04/2014 @ 9:48am

Most of my readers are probably aware that I test my seasonal strategies by speculating with a small position in the futures market. I buy and go long when the long-term charts show an uptrend. I sell and go short when the charts show a downtrend. I am in the market continuously except for a brief period between the spring high at the end of April and the first week of May. This gives me four long trades and four short trades a year.

I started this exercise in August of 1997 and have always had the position, corresponding to the trend of the market. The experience has been interesting because sometimes I end up with a trade that looks absolutely wrong based on fundamentals. Those usually end up being profitable trades. Only once in 17 years has the system caused a big loss. That was August 2012. When I initiated the system, I anticipated that I would have some big losses. I also figured that there would be some big gains. There have been more big gains than big losses.

Counting the unrealized gain from the current trade, the total return is over $9 per bushel. That seems like a huge profit. But if commissions of $100 per round turn were subtracted from the total, the net is negative. I have proved that the seasonal patterns are a credible way to trigger cash sales. I have not proven the seasonal patterns are an extremely profitable way to trade. The most important thing I have learned is that the seasonal trends can be a clue to the anticipated direction of the market. For instance, last December watchers were almost universally negative on futures price outlook. When I studied my charts, I came to the conclusion that there was a possibility that prices could rally. It was February when the the tide finally turned, but it did turn. The price of May soybean futures is now $1.47 higher than it was February 14.

The reaction to the most recent government crop report released this week is another example. The coffee shop talk was about how low prices could go after the report. One analyst was even reported to recommend selling half of the new-crop grain prior to the release of the report. A look at the long-term charts shows that odds are good for a major price peak in the April-May-June time. Trade and farmer reaction to the report is now finally offering farmers a chance to sell both old- and new-crop grain at prices much higher than last winter.

I don't know how high the reaction to the last report will take prices before there is a break. I do know that both soybeans and corn are higher than they have been in several months. Charts show that the best odds for a price peak are around May 1 for soybeans and April 1 for corn. The positive reaction to Monday’s report is very reassuring. This is a good time to divide your crop into increments and decide how much you need to forward price. Be ready to pull the trigger when the market offers the opportunity to lock in a favorable cash flow.

There is a principle for marketing analysts that should be on my list of Murphy’s Laws. It says, “If you are ever lucky enough to be right, never let them forget.” That is my motto for this week in the soybean and corn markets. Next week it may no longer be valid !

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