Critical period for the bears!
May 04, 2010
Well guys and gals, we are now moving into a period of uncertainty for the bear. We saw corn completion at 68% rate after the close on Monday way above the 5-year average. The crop is emerging, not as fast as some want but still way above average. One should see this as very bearish.
On the other side of the equation you have China buying grain and talk of more purchases. At the same time, they are selling inventory out of their own reserves. I believe this is simply a bait and switch play and they want U.S. farmers to be bullish in planting more acres. In the end, will they follow through with the actual purchases? Pro-Farmer had an interesting discussion in their weekly newsletter about how in the past China has bought big but it’s a completely different issue when it came to taking delivery. Finally, the bulls are already talking about the change in the weather pattern. Talk is already starting to surface about an August to September drought in the southern and eastern Corn Belt. Bottom line, the fundamentals have strong players on both sides of the equation. I sense the bears are getting worried if the market cannot break quickly, they may panic.
On the technical side, I have to suggest there is concern for the bears. The market has been trading in a trading channel of about 20 to 24 cents since February. If the market breaks out later this week, all kinds of positive technical signals could be seen. Equally, if the market after last week’s strong rally does fail, the bull will reinforce very quickly to hold and actually extend positions.
Bottom line: Technically, for sellers the next two to three days are critical. Decisions must be made as to what you are going to do about your short position. I see five alternatives: Liquidate and reenter on a sell signal, change form move all short futures to long put to cap cash flow exposure, buy nearby long position or serial call to limit upside risk and finally sell out of money puts to give some upside price coverage. The alternative chosen will depend upon cash flow, conviction about price activity, and how aggressive one wants to watch the market. The key is you need to made that decision today when things are relative quite rather than in the heat of battle when bad decisions are made many times from fear rather than solid risk management.
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