Jeremy Knutson

Thursday, August 21, 2008

Hog Comments - 08-21-08 Corn rallies again as hogs stay mixed.

Dec '08 Daily Corn Chart
Corn had an off to the races type day today, the low's for the day were on the open and it never looked back from there.  Yesterday I talked about the next upside target of $6.24 in the Dec '08 corn and how I thought we would reach it by next week sometime.  We had a high of $6.25 today so my objective was met earlier than expected.  A few things happened today, the market reached the $6.24 resistance level as well as the 50 and 100 day moving averages at $6.17 3/4 and $6.18 3/4 respectively.  If you will notice the market closed right on the moving averages at $6.17 1/2.  I was pleased to see the market close off of the limit because if it closed limit up and gapped higher tonight it would have triggered a sell signal on the daily charts.  I still have a potential sell signal tomorrow if the market makes new highs above $6.25 and then comes back down through them.  The stop order would be placed at $6.24 if one chose to act on this signal.  I don't believe I will act on it from a long-term perspective but if I see things I don't like tomorrow I may use it in the short-term.

I ended up buying corn on the open which just happened to be the low of the day and then exited on our first rally toward limit only to get back long around 12:35 p.m. this afternoon.  I remain long futures on a full position against my short $6.10 calls in Dec '08 corn.  My entry in corn this morning was $6.07 3/4 but I was able to better it by around $.03 cents.  The market didn't break as much as I would have liked and I knew that I needed to be long so I entered my long positions again prior to the close.  I am effectively long futures at $6.04 3/4 in the Dec '08 futures against my short $6.10 calls.  I also own $5.35 Oct call options (they are traded off the Dec '08 futures) below the market so effectively we are long a little more than 1 years worth of feed corn around $5.35 Dec '08 futures.  

I am working on trying to exit the short put options that I sold at $4.30 Dec for a couple cents to take them off the table.  By doing this I am opening myself up to the downside below $5.35 to have unlimited downside.  I will be very careful in managing my long corn positions but if you will look at the chart to the left, the Dec '08 corn has only violated a previous day's low once since Aug 12th, 2008.  We have yet to close below a prior day low.  This tells me a stop below a previous day's low is a good place to hold a sell stop in a trending market.  I would prefer a close below a previous day's low before getting out just because of the volatility in this market.  I expect corn to follow through on its run for higher prices and if we can close above $6.24 then $6.52 1/2 is my next number of interest.  I definitely want to stay long corn through options if possible (I will try to turn my long futures into a limited risk position if the market allows) so I can keep my downside open. 

Bottom-line: I look for a sideways to lower opening tonight which is a great setup for follow through.  I expect the market to test $6.24 tomorrow and I am walking on thin ice by saying this but I feel like the market wants to close tomorrow above today's high of $6.25.  There is a saying that my chart reading teacher from Chicago said "the first time is a fade, the second time is a go with".  He was referring to a test of old highs, the first time they are challenged they are faded or sold in the case of today and then if we test them again we should expect buying above the high.  I tend to agree this go round.  The only concerning thing is that there is a possible sell signal tomorrow and Monday, I don't believe I will use it but something may change my mind tomorrow, as of right now I am going with higher tomorrow.  Funds purchased approximately 11,000 contracts of corn today.

Sep '08 Daily Meal Chart
Soybean meal had a ho-hum day today.  We traded higher up to the $365.00 resistance area that I talked about yesterday only to falter and retrace as the session went on.  I have $340.00 Sep '08 call options in place for upside coverage in meal.  I sold futures this morning around $366.40 and bought them back at $358.00.  I sold futures against my long call option to keep equity that I have in it.  My intent was to keep enough equity to pay for the cost of the option which I did.  I continue to be long meal with an option but my call will turn into long Sep '08 futures tomorrow afternoon because September options expire tomorrow in the grains.  I wasn't impressed with the close we had in meal today but soybeans had a close similar to corn, just below the 50/100 day moving averages.  

I have more confidence in soybeans than I do meal when I look at a chart today.  We held resistance in the meal at $365.00 so I feel we should try test this level again in the near future.  I do have what could be viewed as a sell signal if we make highs above $366.70 tomorrow then reverse and move below $366.70, a sell stop would be placed at $365.70 if one was to trade it.  I don't believe I will for the long-term because I am not bearish at this point and the trend is higher.  I want to see how the market reacts to the last day of the week and if people want to be long or short going home over the weekend.  I expect meal to be a follower of soybeans which I feel will be following corn and crude oil.  Crude oil was trading around $4.44 higher at 1:15 p.m. CST when the Ag markets closed but is up over $6.00 as I write this.  Keep an eye on the Russia and Poland/U.S. issue if you wish to know whether crude will continue to climb or retreat.  There is always something.

Oct '08 Hogs Daily Chart
There is something going on in the hog market.  Cutout was down around $3.54 over the past two days and the futures are down by $.47 cents in the Oct '08 contract and the back end months are higher (mainly with corn).  My buy signal in the Oct '08 hogs today was triggered at $74.55 which I didn't take.  I needed to see the market close above $75.70 today as I stated yesterday before I would ride any bull meaning getting friendly the market on a take action basis.  I had a call yesterday afternoon from a gentleman who reads this blog on a daily basis and he thought I was bullish on hogs or at least suggesting a buy.  I apologize if my comments came across that way.  Please do not use what I write as trading recommendations for your own purposes.  I have found that you need to find one person or a team of people that you work with and trust them to do what is right for you.  

From a broker's perspective, there are too many people out there that gather information from a number of different areas/people that could conflict or even be a detriment to themselves and their positions.  It seems to me they choose to gather as much information as possible out of fear that they will "miss the market" or be "wrong".  It is paralysis by analysis; too much information isn't usually a good thing.  I am a technician meaning I read charts to make decisions; I do however respect fundamentals because in the end the fundamentals always win.  Again, most of my decisions are based on reading charts.  Too much "news" confuses me, lets face it, you can find enough "news" to support a move in the market in either direction.  I have found (long ago) you tend to read/gather the information that is supportive of you directional bias of the market.  It happens to everyone so I try to stay clear of it and I have become MUCH more successful using charts than I ever dreamed reading.   

Again, what  I write is for informational and idea sharing purposes so if you have anything to share you can post a comment, email or call me.  Now, on to what the markets look like.  The cutout was down only $.15 cents today but still down.  Cash was around $2.20-$2.50 lower in all regions and nationally.  I will continue to wait for the market to close above a previous day's high before I get too excited about a reversal.  The buy signal in the electronic trade today was hit and would be THEORETICALLY long at $74.55 with an exit sell stop below $73.60.  I would expect weak trade again tomorrow although the dollar CRASHED today so it may take some pressure off a potential slow down in the export market do to the recent rally in the dollar.  We will continue to monitor the dollar over the coming weeks because it has still rallied a bunch.  Again, I am looking for mixed to weaker trade tomorrow.
Based on FOB Omaha carlot pork prices and industry yields.

           Calculations for a 200 lb Pork Carcass
        53-54% lean, 0.65"-0.80" backfat at last rib
         Total                   Today's Primal Cutout Values
Date     Loads      Carcass    Loin    Butt   Pic     Rib   Ham  Belly
08/21        76.8      90.31  115.15  100.88  70.69 110.79 86.76  84.64
Change :               -0.15   -1.34    1.06  -0.39  -0.27  0.30   0.05
National Direct Hog Price Comparison

                :  National   :    Iowa     :   Western   :   Eastern
                :             :  Minnesota  :  Cornbelt   :  Cornbelt
   Base Price is the price from which no discounts are subtracted and
   no premiums are added.
BARROWS & GILTS :  2.41 lwr   :  2.35 lwr   :  2.18 lwr   :  2.56 lwr
Negotiated      :             :             :             :
CARCASS BASIS   : 75.75-87.16 : 76.00-87.16 : 76.00-87.16 : 75.75-84.50
185 lb Base Hog :   wtd avg   :   wtd avg   :   wtd avg   :   wtd avg
Plant Delivered :    82.77    :    83.12    :    83.28    :    82.00
Head Count      :   25,588    :   13,182    :   16,214    :    8,834
Hurley & Associates believes positions are unique to each person’s risk bearing ability; marketing strategy; and crop conditions, therefore we give no blanket recommendations. The risk of loss in trading commodities can be substantial, therefore, carefully consider whether such trading is suitable for you in light of your financial condition. NFA Rules require us to advise you that past performance is not indicative of future results, and there is no guarantee that your trading experience will be similar to the past performance.

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