Hog & Corn Comments 07/21/09 – Hog cutout up $1.24 on the heels of sell off.
Jul 21, 2009
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CORN – Sep '09 Electronic
Open – $3.23, High – $3.24 1/2, Low – $3.10 1/4, Close – $3.11 1/2 Down $.11 3/4
Thoughts – Long Term (into September '09) – Sideways/Higher
Yesterday I said: "There is no fundamental reason to buy corn at these levels but the market has dropped from $4.60 on it high to Friday's low of $3.16 which makes me wonder how much is left to the downside at this point. There isn't any special signals in the corn chart right now other than we have completed (assuming Friday's low holds) the 5th wave in the Elliot Wave technical indicator, the market is oversold (from June 15th) and I have a cycle low as of tomorrow in the September 2009 contract.
The weekly chart has also shown some signs of the sell off slowing down and possibly looking for a rebound to the upside. The market has dropped too much to ignore protection of these levels via a known risk strategy. Fundamentally we could move lower but we have learned over the last couple of years that the markets don't always trade fundamentally. Risk management would suggest a move to protect this lower priced corn as we have done through a Dec '09 three way option strategy which at this point gives us limited upside and downside. We own a $3.50 Dec '09 call, sold a Dec '09 $3.90 call and sold a Dec '09 $3.20 put.
Based on this position we are near the point of flat ownership of corn at $3.20 basis the Dec '09 contract but if this is the case we will look to sell futures against those short puts to neutralize our position until we feel more comfortable about the prospect of a sizable futures rally. At this point we will look to exit the short options in our position when given an opportunity to do so, we were unable to take off our short $3.90 call for a "reasonable" amount even with the recent decline in the market. Time is our benefactor at this point so we look to give time a chance to work for us and our position.
The Sept '09 corn market will need a close $3.42 1/4 before I get extremely excited about the prospect of a sizable futures rally. Weather has not major threats on the horizon and until it does (early freeze) the markets may trade sideways and range bound for now.”
Sep '09 corn: First, I would like to apologize for yesterday's comments. I was talking about Sept '09 corn in my comments but gave support and resistance on Dec '09 corn. The comments were accurate but the support/resistance numbers were for Dec and again I apologize.
Sep '09 corn had a rough day today closing .11 3/4 lower on the day and closing below the old contract low of $3.16 which was made last Friday. If we have another close below $3.16 tomorrow then I will be looking for another leg down in corn. I see on the charts a conditional buy signal at $3.16 1/2 for tomorrow, this buy signal is a stop so the signal is at $3.16 1/2 stop with a protective risk management sell stop at $.01 below the current low when the buy order is filled.
The corn market really has no fundamental reason to rally unless we get into the early freeze scenarios then we could put some premium back into the market but for now that hasn't happened. I don't believe I would take the trade discussed above unless it proved to me to be a good signal after closing above $3.16 for a couple of days. If this signal is good it should provide a sharp rally which I think will be hard to muster up given the current weather situation.
We remain long via options and will continue to do so. The Dec '09 corn market has dropped just over 32% off of the spring high which is the 3rd largest percentage drop from high to low since 1988. The biggest drop of course was last year but it is almost unfair to include last year as a normal year; 2008 dropped 63.7% and 2004 dropped 44.1%. Lower is the path of least resistance right now and it will take some type of change in weather (or talk of change in weather) to keep the market from moving lower through time. I expect rallies in this market as we move forward but these rallies more than likely will be met with selling.
Bottom line: I am looking for the market to experience an early low tomorrow.
Sept '09 Corn – Support/Resistance for 07-22-09
(R3) Resistance 3: $3.21 1/2
(R2) Resistance 2: $3.17 1/4
(R1) Resistance 1: $3.15 3/4
Today’s close: $3.11 1/2
(S1) Support 1: $3.10 1/4
(S2) Support 2: New contract lows
(S3) Support 3: New contract lows
MEAL – Aug '09 Electronic
Open – $327.30, High – $330.40, Low – $317.30, Close – $322.30 Down $2.10
Thoughts – Long Term (into September '09) – Sideways/Higher
Yesterday I said: "Has dropped considerably with corn over the last three weeks but looks like the Aug '09 contract is trying to find a bottom in this area. As I mentioned in my last post we had a known risk strategy in place and thankfully so because the market dropped much below where our call option strike price. We have since moved our position out to the Sept '09 contract by owning a $320 call, selling a $290 put and a $360 call. Like corn we are nearing the short put strike price and if the market looks like it will continue to find weakness we will sell futures against our short put to neutralize the position.
The Aug '09 meal contract is at the 50% retracement level back to the contract low of $242.10 from December 2008. The market closed slightly below the $319.80 support level last week but is currently trading above this level. In my opinion the Aug '09 contract will have to close above $319.80 this week in order for it to make any type of rally attempt. Like corn the meal market is due for a rebound off of the collapse we've had this month but the question is can the market sustain any type of major rally and at this point my thought is no. Weather our outside forces will have to change to allow the market to sustain a major rally.”
Aug '09 meal: Aug meal happened to be the strongest link in the market today only closing $2.10 lower on the day. Meal is still at the bottom of what is a cycle low on my daily chart and is projected sideways to higher into the beginning of August. The Aug '09 contract really did nothing of consequence today and had a relatively benign trade day. The close suggests we should open steady to better tonight but I believe we will find resistance early in the $323.90 area.
Meal looks friendlier than corn does right now and I want to maintain call ownership to take advantage of the decline we've had in the market. Like corn we will need to see a change in weather or some other outside source of information that will change the way the market is viewed.
Bottom line: I’m looking for the market to experience an early low and a late high tomorrow.
Aug '09 Meal – Support/Resistance for 07-22-09
(R3) Resistance 3: $330.40
(R2) Resistance 2: $325.40
(R1) Resistance 1: $323.90
Today’s close: $322.30
(S1) Support 1: $320.60
(S2) Support 2: $317.30
(S3) Support 3: $315.20
HOGS – Aug '09 GLOBEX
Open – $64.65, High – $64.675, Low – $62.05, Close – $62.50 Down $2.15
Thoughts – Long Term (into August) – Friendly
Yesterday I said: "August hogs have rallied nicely since my last post as well as the cutout values. Cash has been stubborn and remains so with packers cutting kills and refusing to bid higher money to move hogs. The August '09 contract is now trading $6.04 premium to the CME cash index so this means something has to give, cash or futures. At this point one would almost certainly think the futures are going to give because of the packer's behavior but they can change their mind on a moment's notice.
The Aug '09 contract has rallied to just above the 50% retracement mark of $64.40 and the next major resistance level is going to be the 62% retracement level of $66.10. I have a cycle high projected for this Thursday and it has the Aug '09 projecting lower into the first week of August. The cycle high is coming in conjunction with the market losing momentum to the upside as well as being over-bought which leads me to believe the August '09 contract is living on borrowed time unless cash finally makes a push higher."
Aug '09 hogs: Took $2.15 off the market today due to sell stops as well as a weak cash market. The cash did finally close over a dollar higher on the day and cutout was up $1.24 but I believe the higher cutout was figured into today's trade. I am of the opinion that August '09 still has some room to move to the downside unless we can get the cash market to keep bidding up for hogs like the USDA reported it did today.
Packers have a positive margin and they need to begin using it on a consistent basis as well as keeping the cutout market higher before I get too excited about the upside in the Aug '09 contract. The market has rallied some since the afternoon cash and cutout reports have come out but there are willing sellers above the market to absorb the buying. I am looking for hogs to take a breather tomorrow after today's big decline but I think it will be met with selling unless the cash market shows extended strength.
Bottom line: I’m looking for the market to make an early low tomorrow and firm as the day progresses.
Aug '09 Hogs – Support/Resistance for 07-22-09
(R3) Resistance 3: $64.40
(R2) Resistance 2: $63.675
(R1) Resistance 1: $63.35
Today’s close: $62.50
(S1) Support 1: $62.05
(S2) Support 2: $61.35
(S3) Support 3: $60.80
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