Tag Archives: trading

Gold’s Precarious Support

The gold market has simply been stagnant for more than a year now. Prices may be higher year to date but virtually any gold traded at $1,300 per ounce over the last year has seen both sides of the ledger. The trading pattern that’s developing continues to consolidate. The tighter this consolidation becomes, the more explosive its breakout should be. This week’s piece will be short because this is one of those instances when a picture really is worth a thousand words.

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Historical Wheat vs Corn Spread Prices

Trading the grain markets has always been tricky, especially during the planting and harvesting periods. Historically, this has placed us at the agricultural epicenter for global grain trade. Obviously, tension in Ukraine and the corresponding 15% spike in wheat prices have reminded everyone that even the agricultural markets are now a global game. In this respect, it’s no longer enough to keep an eye on domestic weather patterns to determine the success of our winter crops or anticipate spring wheat seeding. Now, it is imperative to focus on global production issues and World Trade Organization (WTO) agreements, as well.

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Overheated Heating Oil Market

I was fortunate enough to be interviewed for a Wall Street Journal heating oil story last week. The primary question was, “How high can prices soar?”  Supplies have tightened up considerably during Mother Nature’s onslaught and another bout of cold weather is hitting us, pushing prices higher yet again. Short-term demand related issues like the ones we’re experiencing now due to the weather are never a reason to jump into a market. My less than sensational outlook on current prices pushed me to the closing section of the article. This week, I’ll expand on the topic by looking at the diesel and heating oil markets and formulating a trading plan for the current setup.

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Hog Futures About Face

Trading is always a measured risk and best guess scenario. We use the tools and information we have access to in an attempt to predict future market direction and magnitude. This must be balanced against the risk and then the odds, along with the risk and reward scenario must be calculated to determine if the trade is worth taking. Every once in a great while multiple forces align themselves and make the task of calculating variables much easier. This is the current situation in the lean hog futures where fundamental, technical and seasonal factors have all combined to put a halt on this market’s rally and set the market up for a profitable short position based on declining hog prices over the next two weeks.Trades lasting more than a day or two require a proper assessment of the lay of the land. This means starting with the fundamentals. The greatest fundamental impacts on hog prices are the price of corn and Chinese demand. The high price of corn over the 2012 crop year did cause breeding sow numbers to decline. However the increase in hog prices due to Chinese demand was enough to allow farmers to hold on to breeding sows that in normal years would’ve been sent to liquidation. Research from Purdue University showed that, “increased lean hog prices combined with lower feed costs have translated into reduced losses of about $30 per head – about 40 percent coming from the lower feed prices and 60 percent from higher lean hog futures.”The equation of measuring herd sizes, slaughter rates and feed prices is better left to the professionals and universities. The end result of their analysis is their actions in the markets. Tracking their buying and selling as well as their magnitude provides a single variable that can be measured against price. This simplified equation of the degree of commercial trader buying or selling relative to the current market price can be tracked through the Commitment of Traders Reports published weekly by the Commodity Futures Trading Commission. Commercial traders have sold more than 20,000 hog futures contracts since the end of September. Clearly, the commercial traders see their market as currently over-valued.Seasonally, hogs are coming into their weakest period of the year. Hogs tend to slow down in the heat of summer. They feed less. They breed less and their prices tend to rise. Moore Research has shown that hog prices tend to decline dramatically during the first two weeks of December. This follows the end of summer and the expiration of consumer demand once the packers have stocked the stores for the Holidays. Moore Research has shown that hog prices have declined during the first two weeks of December in each of the last 15 years by an average of 4.15% for an average profit of $935 per contract. Their numbers provide an estimated target of 82.45 in the February lean hog futures while the average ending price provides an outside target of 60.00. Perhaps a weighted average is a better yardstick due to the structural change in the Chinese demand growth. This makes 74.50 a more likely outside target.Technically speaking, the hog market set itself up for a perfect reversal. The hog market has rallied nearly 15% since making the September lows and spent most of last week churning near the highs. Monday’s trade brought an outside bar along with a close in the bottom 10% of the day’s range. Psychologically, this meant that the market tried to move higher and couldn’t which resulted selling pressure as weak longs were flushed out of the market once it breached its lows from the previous week. The close in the bottom 10% of the range after an outside day is a textbook reversal pattern from the Larry Connors book, Street Smarts. Linda Raschke, a well-known trader specializing in quantitative analysis, developed this strategy. This forecasts lower prices ahead based on her work.The markets rarely provide traders with this many clues to future direction or opportunity. Frankly, traders with enough experience may simply consider this a very well baited trap. Therefore, risk controls must always be put in place. There’s no telling when a seasonal pattern may not hold true and there’s no point wasting years’ profits on stubbornness. Protective buy stops will be placed above the reversal bar’s high at 87.775. Profits will be taken at a minimum target of 82.45 the average decline or, December 18th, the end of the seasonal weakness.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Sandy’s Effect on the Cattle Market

Sometimes in this line of work the misery and poor circumstances of others creates profitable trading opportunities for our clients and us. Hurricane Sandy is making life miserable for millions of people. However, it is also providing us with an opportunistic trade in the cattle market. Millions of houses, stores and restaurants without power means that there will be lots of spoilage. Replacement of the red meat can only come from existing supply. Therefore, as we mentioned last week, tight current stocks will grow even tighter as the kill rate increases from animals already on the feedlots to meet the surge in demand.

My first experience with this trade was the ’03 Northeast blackout. The initial rush to liquidate positions in all markets and sell stock index futures to protect equity positions came in as a hedge against a repeat of the nightmare attacks of September 11th. Once it became clear that the blackout was caused by a power grid failure, the markets resumed their normal trading pattern and fear subsided. That was the largest blackout on record and affected approximately 55 million people. The crushing demand to refill the freezers created a 20% rally in the live cattle market that started on August 14th of ’03 and powered to a peak two months later.

Two thousand and five brought hurricane Katrina to the Gulf coast and displaced more than a million people. Obviously, there was far more to the reconstruction than just getting the power back on. For the sake of our purposes, the total loss of all red meat in houses, stores, restaurants and storage facilities caused the cattle market to rally 12.5% between September 1st of 2005 and October 12th.

The second largest power outage took place in Europe when the power grid failed and created massive blackouts in Germany, Spain, France, Italy and Belgium. This happened in November of 2006 and created an initial rally in the cattle market of 18.6% as cattle prices bottomed at $85.55 on November 4th. This also effectively put a bottom in the market for the next several months, finally peaking at 102.02 on March 12th of 2007.

Later in 2007, Barcelona went dark, affecting more than 1.5 million people. This was one of the longer outages as it took up to 78 hours to get the power back on throughout the city. The net effect was a rally in live cattle prices from July 23rd of 2007 through the end of the month of 8.7%.

The most recent example is Japan in March of last year. The tsunami and evacuations displaced around 500,000 people. Obviously this was a case of bringing only what they could carry and leaving everything else behind. Therefore, all perishables were a 100% loss. Fukushima’s impact on the cattle market was an 8.3% rally between March 18th and April 4th of 2011.

The current power outage estimates due to Sandy appear to be around 7.5 million people. It’s been reported that nearly a quarter of New York City is still without power as well as the same proportion throughout the state of New Jersey. This equals about 1.8 million people in NYC and another 2 million in New Jersey. The sum total of people without power into their second day is another 2.3 million in the surrounding areas with Pennsylvania in the worst position with more than 900,000 still without power.

The December live cattle futures are currently trading around $126 per hundredweight. The average statistics for the outages cited is a rally of 13.5% peaking 28 days after the event. This gives us a target price around $143 per hundredweight and a target date of November 27th. Given the current look of the live cattle chart, we will be buying the market as it picks up steam and risking the trade the recent low of $124.60. Therefore, our risk profile for this trade is to risk $800 per contract while hoping for a profit of as much as $6,640. We will start to lock in profits however at the much less greedy level of $136.70, which represents the minimum average upside movement we’ve seen during events like this while still maintaining a solid profit/loss ratio of $4,000/$800.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.