Overcoming Greed and Fear in Commodity Markets. Larry Martin, Ph. D. Agrifood Management Excellence ,

Transcription

1 Overcoming Greed and Fear in Commodity Markets Larry Martin, Ph. D. Agrifood Management Excellence ,

2 Introduction Presentation based on our company s recent column in Country Guide Work with farm and agribusiness clients to manage price risk Issues in managing price risk include: Failing to sell at high prices and then taking low ones Panic selling at low prices and foregoing opportunity, including having large margin calls Just went through major rallies on grains and livestock should I sell here or wait for it to go higher?

3 Introduction Those are manifestations of fear and greed. Constantly have bull bag and bear bag it s what makes a market In red meat at the moment bearish supply numbers, bullish domestic demand, strong but uncertain export demand Similar in grain demand issues are at least as important as supply, are there any techniques that can help manage some of these issues in uncertain markets

4 Wrong Question Most frequent, but least relevant question is what do you think these (hog, corn, canola, C$, soy, corn...) prices are going to do?

5 Right Question, As prices change, where do I take action and what action should I take?

6 Objectives Define some methods of reading price charts that can help change the question from where do I think prices are headed? to where should I take action? Suggest and illustrate some trading rules for deciding when and what actions to take.

7 Market Conditions: The Bull Bag Positive carry for Dec corn and Wheat Drought affecting corn and soy in Argentina, South Africa, Paraguay Major hog expansion in China Strong domestic demand for red meat Low soil moisture in US southwest

8 Market Conditions: The Bear Bag Livestock heavy US supply, major expansion in Chinese hog production Lots of meat in inventory Grains large inventories, especially wheat, large Brazilian crop, good soil moisture in Russia, Ukraine, Canada Very large Malaysian palm crop India has substantial tariffs on edible oils Managed Money just moved to large net long positions for corn and soy, or substantially reduced net shorts for wheat Trump!

9 Trade Policy: The Uncertain Bag The wise leader of the US threatens to pull out of NAFTA, creating uncertainty in red meat The wise leader of the US pulled out of TPP, giving Canada a wonderful opportunity in an agreement that favours red meat (See New Yorker article, Making China Great Again!! The Guy with the Pretty Hair was wise enough to opt into CPTPP and, potentially, the Chinese equivalent Russia, Ukraine, Brazil are all investing heavily in transportation and port facilities. Canada, not so much.

10 Some Chart Concepts So, with all this uncertainty, where do we think prices are going (oops)!! Where should we take action and what action should we take? Six chart formations that help interpret price trends. First, historical volatility:

11 Live Cattle Continuation, 1990 Last Friday LIV CAT APR8 ( , , , , )

12 Corn Continuation, 1990 Last Friday CORN MAY8 ( , , , , ) % % % % % %

13 Support and Resistance Resistance Flat line along tops Support Flat line along bottoms Life of contract high/low, double or multiple tops, Fibonacci retracements can be particularly significant

14 P SUPPOR DRAWN PAST LO P LIFT SHO HEDGES TOWARD PLANE P MOST SU LIFE-OF- CONTRA Stylized Resistance and Support at Contract Highs and Lows

15 Double Top! DOUBLE TOP ALONG MAJOR RESISTANCE PLANE! DOUBLE BOTTO ALONG MAJOR SUPPORT PLANE! RELIABLE FORMATIONS

16 March Spring Wheat Future Multiple Bottoms and Tops

17 Key Reversals Tops contract high, outside day, lower close Bottoms contract low, outside day, higher close

18 Key Reversal Top and Bottom

19 Fibonacci Retracements 62% 50% 38% P MARKET MOVES IN CYCLES P MARKET TENDS TO CORRECT THE PRECEDING MOVE IN PRICE P CORRECTIONS TEND TO BE 38%, 50% OR 62% P CORRECTION PROVIDE PRICE OBJECTIVES P FIRST OBJECTIVE IS 38% CORRECTION

20 March Spring Wheat, Multiple Tops and Bottoms, Fibonacci

21 Relative Strength Index Based on previous 14 days prices Measures the short term momentum of price trend As it s name implies, it s an index means no trend 80 means strong upward trend 20 means strong downward trend We use divergence of RSI and bar chart as indicator of change in trend

22 Relative Strength Index with Failure Swing RSI 70 30! PRICE DIVER SUGG REVE! RSI GI WARN! RSI AL PROD OPPO! KEEP

23 RSI is Based on 14 Days Prices MACD is similar concept based on much longer time series of prices, and measures longer term momentum Not an index, can take on positive or negative values 0 means no trend Positive means positive trend, higher the stronger Negative means negative trend, larger the stronger We use both to determine divergence and help understand if we have a top or bottom a way to confirm what we see on the bar chart.

24 March Spring Wheat Bottom: Diverging on RSI and MACD

25 The Fundamentals of Technicals When a market has several months in a channel like wheat, Interpretation is that no matter what s come out of the bull or bear bag for four months, the market can t justify taking the market outside this $.50 range

26 Break Outs Once significant resistance or support is on the chart, then a change in fundamentals is reflected in a break out. Break out: two consecutively higher (lower) closes above (below) resistance (support), especially on heavy volume and no divergence. With wheat, poor weather in SA or winter wheat area could take it higher, good weather, poor US export demand could take it lower.

27 Applying These Concepts to Trading Rules in Markets to Help Overcome Greed/Fear Used July 18 Lean Hogs and Nov 18 Soy Futures or their Futures Options Suggest using it on a portion of hogs. One futures contract = hogs Selling futures (Short) now is a temporary substitute for selling hogs in July in the cash market. Can buy back any time until July. Buying back lower is a profit and offsets potential loss on a lower cash market Buying back higher is a loss and offsets potential gain on a higher cash market

28 July Lean Hogs, Dec 2.

29 July Hogs on Dec 2 Multiple tops at $84 Near highs of 2015, 16 and 17 Major divergence on both RSI and MACD Weak key reversal on Nov 30 at $84.10 high

30 Trading Rules Sell futures now, locks in a good price in a falling market Risk is you will get priced too low and pay margins Can be addressed with the breakout rule ie buy stop on your short position on two consecutively higher closes than $ Or Buy a Put to Establish a floor price, using Fibonaccis and aiming for a premium less than 3% of the strike price The 38% retracement would suggest an $80 Put, currently ~ $3.20 > 3% So move down to a $78 Put, = ~ $2.50. This would give you a $75.50 floor and let you speculate that the cash market will go higher.

31 July Lean Hogs, Dec 2.

32 So, Follow What Happened Since Dec.2

33 Lean Hogs, Jan 7 Relative Strength Index MACD L HOGS JUL July August Septem ber October Novem ber December

34 January 7 Got stopped out at $84.50 on January Fibonacci projection is $88, so look for another chance to sell there or another higher level, or sell again on two closes below $84

35 Lean Hogs, Jan 26 Relative Strength Index MACD L HOGS JUL8 0.0% % % % % % August Septem ber October Novem ber December February 1

36 January 26 Never got to $88 But several tops just over $85, Jan Lots of divergence with RSI and MACD during that period Key reversal top on Jan 25 Lots of sell signals

37 Lean Hogs, Last Friday Relative Strength Index MACD L HOGS JUL8 0.0% % % % % % August Septem ber October Novem ber December 2018 February March April

38 Lean Hogs Today. Still short at best, so paper gain of ~ $85 - $75 At worst, took a profit just above $80, resold at ~$79

39 November Soybeans Today Relative Strength Index MACD SOYBEANS NOV Novem ber December 2017 February March April May June July August Septem ber October Novem ber December 2018 February March April

40 Nov Soy Today When Soys went through Resistance at $10.28 ¾ in mid-february, no divergence on either RSI or MACD, so no sell. No significant divergence at new high No two consecutively lower closes below $10.28 ¾ since the breakout, So, no sell signal yet.

41 Summary Forces me to take a view of where the market is relative to it s recent past helps identify highs and lows Can be used for forward contracting, don t need to use futures and options to get value from the chart. Obviously, not always going to be right, but Helps identify places with high probability of doing well on futures or options Helps reduce losses by limiting margin payments, Or Helps retrieve some of any price appreciation after contracting with Calls Gives disciplined decision rules that keep losses fairly small