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Hedging Corn and Soybeans

RSS By: Howard Tyllas, AgWeb.com

Howard Tyllas is currently a member of the Chicago Board of Trade and registered with the Commodity Futures Trading Commission as a floor broker and as a Commodity Trading Advisor.

July Soybeans Daily Numbers & Trade Ideas for 6/28/11

Jun 29, 2011

This grain report was sent to subscribers on 6/27/11 1:55 p.m. Chicago time to be used for trading on 6/28/11.

July Soybeans

After the close recap on 6/28/11: My pivot acted as resistance and was 13.51 3/4, .05 1/2 from the actual high, and my pivot acted as support and was 13.31, .03 from the actual low.

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All charts and numbers for 6/29/11 have already been sent to subscribers at 5:05 pm.

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July Soybeans

13.57 ¼ XX
13.51 ¾
--------------13.31 Pivot
13.10
13.01
13.92 ¾
Trend
5 day chart... Down from last week same day
Daily chart .... Down
Weekly chart ... Up
Monthly chart Up $13.24 is the 200 DMA
ATR 24 Balanced 41%

soybeans 6 28 11

I continue to say "Up and downtrend lines crisscross at $13.33 and are pivotal now. The low in May and then March are supports".

Notice how the crisscross of the up and downtrend line acted as perfect resistance on Thursday, this is not coincidence.

In my daily soybean numbers on Monday; my resistance was .03 ¼ from the actual high; my support was .09 from the actual low.

For 6/28/11:

Grains: Spot on corn numbers, spot on resistance and accurate support numbers. The market did indeed want to test last week's lows, and even though old crop made a few intraday lows, December corn held the low made early at $6.20 ¼, $.00 ¼ from my support number. I had 4 producers call or email me about extending their put protection $.40 when the market traded for most on the morning below $6.24. I told them all the same, it is never wrong to buy more protection, but I would not sell where the chart and numbers tell me to buy and risk $.06 on the trade idea. Buying put spreads (same as selling) just above support I never condone doing and especially after breaking $1 a few days before the report. I said I would rather pay another ½ or ¾ cent if the market went $.06 below there. I also said if we could rally $.10 or $.20 I would buy it then. Be consistent in what you do, if it is not broken do not fix it, and my subscribers and producers have come to expect that it is very rare that I step out of what works for me. I always have my eye open for a new pattern, or a nuance in a current market, and to reduce risk yet improve profits, but I have done all I can to get my mindset in the right place to form the approach I have, and to be able to execute it.

July corn open interest is plummeting with end users must be looking for a much higher stocks number. Traders might be factoring in a higher acreage number as they well should. December corn has every right to go to $5.50 with favorable weather, but it is hard to see the market going into the report and then the 4th of July without some short covering and end of the month/quarter profit taking. The 3 day weekend can continue to produce favorable growing weather, or forecast hot and dry for the July weather pattern and that could certainly produce a limit up move. This is a crap shoot and I would NOT have a position over the weekend, and wonder when the barbecue is ready instead of wondering how much I could lose or make on Monday night. All I can go on is my chart to give me a good idea where I should buy and where I should sell that allows minimum risk, and give me realistic projections for objectives.

Outside of the charts, if you want to make a bet on what the market will do for whatever fundamentals you have in mind, make sure you bet on YOUR thoughts about what could happen fundamentally, and nobody else. This is because it is impossible to know the outcome for months. The beauty of a trader is being able to choose the timeframe for trading, and some trade ideas choose the timeframe for you. Thinking there will short covering before the report is an example of a trade idea giving you a timeframe.

Unlike corn, July soybeans show a large long position and must be thinking there will be less acres and a bullish surprise. Strength in soybeans was impressive considering the action in corn and wheat. I warn you, if there is a bearish surprise on the report, you could see the same liquidation as seen in corn.

Soybean planting is now 97% complete which is more than the 5 year average of 96%. What did surprise even more was the crop ratings dropped 3% to 65% good/excellent. Last week we were above the 5 year average and now it is below by 1%. In 2008 we only had been 58% good/excellent at this time.

Corn crop rating fell 2% to 68%. Ratings drop is probably reflecting some of that wet late planted crop. 5 year average is 70% but still much better than the late planted 2008 crop at only 61%. The ratings drop is why I thought we would be $.10 higher in corn and $.04 in soybeans, and corn did manage to fill the gap and get the buy stops above, but it did not take long to realize there was not much interest in the market tonight let alone attracting more buyers up there. As I write we have put the oars in the boat when about $.06 higher in corn and $.04 higher in soybeans.
I have pointed out to you a month ago $6.25 ¼ in December corn as being the place if we close below there to get more protection, and we rallied $1 from there. Once again we are testing that support. I do like the fact that we are above the 200 day moving averages in corn and soybeans when buying the market, ... SUBSCRIBE NOW... On Friday or for sure when we come back from the July 4th weekend, option premium will come down (unless sharply higher) and the "out of the monies" will get hit first.

I want to trade the numbers without bias today and risk $.06 in corn and $.08 in soybeans using a stop to protect any idea.

6/27/11:

Grains: Spot on numbers!

December corn at $6.25 ¼ is still in play for defending the bull side of the story, and the number we have used in the past for support and what has kept us long. What did you do to take advantage of it, and what did you write in your journal to improve what you do in the future? All of my producers to one extent or another have rolled up to the $6.70 put spread at the minimum, and most are at $7. Most ....Subscribe Now... Only then can I pursue higher prices knowing I have protection that will keep a percentage of what was already gained if I am wrong and the market goes down.

Even though it is simple to understand... Subscribe Now..., but when the market plummets $1+ before you wake up you can see the beauty in a strategy that captures the high or close to it, and rewards you for a percentage not for being right the market going up, but right in the strategy that "allows" for more profits when the market can rally. The alternative is trying to "pick the top" and then playing the correction game catch up, that could turn into disaster as in 2008 getting $2.90 by harvest.

The un-hedged producer, who was envied when at the high of 2011, turns to laughing stock watching them unravel now. Hindsight is 20/20, and people who want to ignore reality and imagine they could have done well (saving money not using a strategy like mine) to not have hedged when the market was going to the high, but do not want to imagine what they would do now when the market is crashing. Do they hedge now? Do they risk the market going down more in order to try and sell higher? Does the un-hedged producer consider that their income has more to do with gambling on the outcome in time of higher prices, rather than the actual production of their crops? His income has more to do with "speculation" than farming. Surely un-hedged producers have survived the draw downs of the past in order to obtain higher prices but remain un-hedged, but just as they do not have a plan when to actually hedge because that would mean ending the upside potential, they have no plan on protecting income as the market goes down. Now they are faced with the actual 2011 high, and the producer same as a speculator will want to sell at least some of their position if we get back near those highs, but like 2008 it never gives them that chance. They want to sell $1 higher from here but instead the market goes down another $.50, and now they want to sell if it just gets back to where it was $.50 higher that was just lost. They become a victim of their own doing, like being an automobile without brakes.

People with sound strategies or ways to do things at the best way possible, you are smart to learn from them to help improve the way you do things. Like most things, trying to beat the odds is not the smart thing to do. I am watching the progress of my producers, and as time goes on they are more confident than ever about the control they have through the understanding of the strategy they are using, and seeing in real time the possibilities of the upside, as well as what you can do with the down side. Everyone is willing to buy "out of the money" call spreads, even above the "all time highs" such as $1 above in the grains, but will not even think about buying a $1 put spread at a price we have averaged over the last 5, or 10 years, and this is the result of being human. Casinos are not human. I have made more money on the downside than I have made on the upside especially in day and swing trading. Over the decades no matter the market, the downside always comes much more quickly and severe than the time it took the rally to accomplish.

You must realize as my mind constantly thinks like a casino owner, common sense and logic tells me there is much more probability for something to trade back into a value area of the past rather than bet on it making a new high. How many times and how many years can something make a new all time high? I know corn has traded $8 and $2.90 since 2008 with $5.45 being in the middle or pivot, and betting corn could go lower seems to be more logical than betting it will make a new high let alone SUSTAIN it, hence another reason to use a strategy that has built in safeguards (subscribe now) and can extend upside ....

June 2011 has produced one of the biggest breaks on record in the corn market, which leaves me to think the market should find support going into the report. As I have said since I started this service, the funds are second only to Mother Nature for controlling the near and sometimes longer term control of the market. At one point the funds had almost twice the position as the actual corn carryout. I have always warned that if they decide to liquidate for whatever the reason, the market will go down no matter the other fundamentals. The CFTC reported for the week ending 6/21/11 the funds sold 60,100 corn contracts, and since Tuesday the funds are estimated to have sold 55,000 more contracts. Their net long position may have dropped below 225,000 which are the lowest since July 2010. Just like a chart where I do not care what the reason it is that got us to a significant chart level, I want to exploit it. I could care less about the reason the funds want to liquidate, I just want to try and take advantage of it. I am trying to say it makes no difference the reason why they want to liquidate, what matters is they are.

The wild cards this week is the acreage and stocks numbers on this Thursday's report, and end of the month end of the quarter book squaring especially in the grain markets going into the usually volatile July 4th weekend. I would use the lows of last week as support going forward, but with the current weather patterns the trend is lower. Last week's highs are now resistances and unless the bulls can hurdle those numbers, the bears will remain in command. I had said long ago that the highs were in for the old crops, and recently said the same for new crops.

Markets are extremely volatile now with the average trading range in corn now is almost equal to a daily limit move. You must think before the market moves, not after. You should always think ahead of the market, and know exactly what you will do at all times, even if the plans are changed as the market moves. You will never know what the market is going to do, but always know what you want to do. The one thing I am always certain about is risk. I never change that to accept more risk; the only change there would be reducing the original risk. The market does not even know what to do right now, look at Friday's action, sharply higher overnight posting $.17 gains in July corn only to close $.10 ½ lower at $6.70. December closed down $.14 at $6.32 after posting a high overnight of $6.56 ¾. What I ask myself is if the report is a little bearish has the current drawdown in price already been factored into a bearish surprise. That is why I always say I do not care what a report has to say, I care how the market reacts to it. This week the funds and end users only know what they will do before the report, or after the report, because first notice day is the day of the report and they should base their willingness to want to take delivery if stocks are tight, or dump their longs in favor of going hand to mouth looking for cheaper prices. Just remember, fundamentals are a moving target right now, and anyone who says they can predict where prices could be in the next 3 days, 3 weeks, or 3 months, are fools unless they said it is their "guess". A chartist has a much better "guess" in projecting possible price outcomes, and can be right for all the wrong reasons.

I almost always give some projections and numbers going into the report, but on this report given the swings in the market lately, will do little to give me a trade idea before or after. It is the chart that tells me to not be pressing the short side going into the report, because the risk reward from here favors the bulls. I am bearish and want to sell chart resistance levels looking for lower prices to come in July, so I would stand aside going into this report. The market will have its own take on the USDA numbers until July 12th when the USDA revises its supply/usage balance tables. Guess, guess, guess, but the last price is never the wrong price, it is reality. I do not base my trade ideas on guesses, or guessing what the weather, production, or the funds will do, but base everything on the charts and my ability to know where to risk $.06 to make a much better reward. I know why I am right, and know when I am wrong, and that is because the number or chart level did not hold. What fundamentals changed from Thursday night or even Friday's opening outcry bell to Friday's close? Nothing! What did occur was the inability for July corn to recapture the uptrend line failing a couple of cents short from doing so, and providing a selling opportunity $.60 higher than the previous day low.

July corn chart clearly shows the uptrend line being the line in the sand for who controls the market. The same numbers are support as before, and the low on January 7 where we left the gap at $6.08 ½ is Custer's Last Stand. We had a nearly $.60 rally from Thursday's low to Friday's high, let alone a $1.60 break that occurred in 9 trading days. You must think and execute your plan before the market moves no matter up or down. It would not surprise me to see Thursday's low being tested again before the report, but the risk reward being short here is the same as being long at $8. I have always said markets can and will do anything, so I would prepare for the worst case scenario, that way I can reduce my exposure and be prepared for the worst. It does not bother me to do this, but people new to this idea take time to see that you want your protection to expire worthless and that it was not a waste of money but instead money well spent. Think life insurance, and you will have no problem paying money and being alive to pay that premium at least until your children are grown up and your spouse is financially secure. Money well spent. It might be a luxury for some and cannot afford to buy piece of mind, but when you have $6+ corn probably giving you a record hedge, you should have money to pay for this luxury.

December corn chart shows what was support is now resistance at $6.53, and then the bracket line continues to be key resistance. The low of May, April, and especially the low of March support the new crop. I could see a sideways market develop the next two weeks with $6.85 (the bracket line) being the high, and $6.10 being the low.

July soybean chart is hugging the downtrend line lower and could test the low made on Thursday. Below there the gap at $12.78 near the bracket line should provide solid support especially before the report comes out. The uptrend line which provided solid resistance on Thursday and Friday will continue to resist unless recaptured by the bulls.

November soybean chart downtrend line provided perfect support on Friday, and the bears were unable to recapture it. The bears are exhausted at this chart level but can recharge their batteries if they close below there for 2 days. Otherwise I expect corrective action to the upside. Uptrend lines provide resistance this week.

I want to trade the market without bias today and risk $.06 in corn and $.08 in soybeans using a stop to protect any trade idea.

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Howard Tyllas

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