"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, October 24, 2014

Has the Bean Market Rally Finally Halted?

Beans have rallied an astonishing $0.98 since the first of this month. Why I say, 'astonishing' is because we are in the midst of harvesting a massive bean crop with the possibility of having a carryover nearly 4X as large as what we were left with for the 2013-2014 marketing year.

Part of what has contributed to this very unexpected ( because of the sheer size of the rally ) move higher has been that extremely tight carryover of which I just wrote. With the beans ( and the corn ) lagging the normal maturity levels somewhat, harvest has been running a bit behind the normal pace. ( Remember - I submit that the reason for the lag in maturity has been the near ideal finishing conditions for the plants, warmth and moisture, which has kept the plant pumping nutrients into the ears/pods instead of beginning the normal shutdown process. Translation - bigger yields!).

The slower pace of harvest means that some end users have been scrambling for supplies while they waited for the new crop to hit the pipeline. So we are faced with the anomaly of soaring bean prices over the last three weeks during a time frame in which we normally see prices working into a harvest low.

What has led this move higher has been the meal. For those who are new to grains, meal is made from crushing beans. The other by-product is soy oil.

There have been some reports coming out of the Eastern belt that processors are having trouble getting enough beans to crush. I do not know how reliable those reports are but let's just say that apparently the meal market believes it.

Look at this chart and you will see what I mean. Meal has rallied $65/ton since October 1! it is this strength which has driven the beans themselves higher. This is the normal for bean rallies - they are always led by meal.

However, this market may very well have run out of upside steam this week. It is still too premature to call an end to this rally but there are some signs that need to be heeded.

Look at where the rally has run. It stalled out just above the 50% Fibonacci retracement level which is near $353 before it closed BELOW that level today ( Friday). The market did however manage t to close over the 100 day moving average which is a big deal technically; however, the key for that next week will be whether or not it can sustain any upside follow through and remain ABOVE that 100 DMA. If not, there is a good chance that the meal has topped and with it, the beans.

By the way, every now and then we get the occasional "self proclaimed trading genius" who scoffs at those of us who employ Fibonacci numbers in our trading strategy. What I can say to them is that in all the years I have been trading, I find myself constantly amazed at how close these various levels are to reversal points that markets make. They are not fool-proof ( no trading method is ) but they are reliable enough that any professional trader ignores them at his or her own peril.

So has the bean market rally finally halted? We shall certainly see next week.

One other thing - the Cattle on Feed report confirms the tight supply of cattle that livestock traders are well acquainted with by now but it did show a bit larger number placed than at the same time last year. Still, the comp was already tight. That being said, while the cattle chart is one of the few charts in the entire commodity complex that has been very strong, the December is having trouble cracking the ceiling at $170. For long time cattle traders, some of us remember during the bust years seeing cattle prices at a THIRD of that. I am talking about a "5" handle in front of the cash cattle prices! That is to provide some perspective just how high these nose-bleed prices are in the cattle industry.

I am still keeping a close eye on this market for signs of a permanent top. I still think that cattle are living on borrowed time, giving the overall trend towards lower prices in the commodity sector, not to mention the increased competition from cheaper pork and chicken. The one thing that has kept beef elevated in my opinion, longer than I originally expected, has been the sharp - and I do mean SHARP, fall in gasoline prices. Cheaper gas leaves mom more money to buy high-priced beef but even cash-flushed moms have their limit.

So far, while this market has bent, it has yet to break. Big specs keep coming in and defending their long positions and have had the wind at their back as packers keep paying up for cattle to fill their slaughter schedules.

Lastly, hedge funds have been huge buyers in the corn of late and that is partly responsible for the $0.45 rally in corn since October 1. Based on today's COT report, hedge funds have covered, or bought back, 60,000 short positions since the start of the month. Yes, you read that correctly. We have seen a MASSIVE Short covering rally in the corn. I am also watching that market to see if it is running out of steam to the upside as well.

With wheat putting in an Downside Reversal Pattern today, it could be that the corn is ready to move lower into a final harvest low. Still, with all that has transpired in the grains these last couple of weeks, I am certainly treading lightly!

Here is the wheat chart. An interesting thing about the price action. I have noted that on the way up, $5.20 was a tough nut to crack but if cracked, wheat could run to $5.40. Guess what, it ran through $5.20 and managed to close above that level yesterday for the first time, then promptly ran to $5.39 1/4 before COLLAPSING BACK DOWN through both levels today! WOW...

With all the goofy money flows this week and huge spread positions being piled on and taken off, I am a bit leery about prognosticating anything about the grains with much certainty right now but this is usually one of the more reliable technical signals. Then again, Wednesday's sell signal in the beans and in the meal immediately was negated on Thursday so there ya go! The motto is: "NOTHING IS EVER SURE IN COMMODITIES - NOTHING!". Just about the time you think you've got things all figured out, a steamroller flattens you and leaves you wondering what the hell just happened to you!
Enjoy the weekend - the drill starts over again Sunday evening!

Mining Shares Continue their Meltdown

Before getting into the particulars of the charts from the mining sector, take a look at the continued exodus from GLD. The gold ETF shed yet more tonnage dropping nearly 5.5 tons from yesterday and is now down to a mere 745.39 tons of gold. At the risk of beating a dead horse, we now have to go all the way back to OCTOBER 2008 to find such a trifling sum in this once proud flyer. At its peak some two years ago, there was over 1351 tons of metal in this exchange traded fund.

Western-based investors simply want no part of the metal right now which brings us to the mining shares. The GDXJ, an index composed of junior miners is pulling a disappearing act. Down over 2% today alone, the index made not only a NEW WEEKLY LOW close for the year, but has now gone negative on the year with today's close at 30.95.

The Index is now a mere two points away from its all time low!

Simply put, if it looks like gold, guys running investment portfolios are not interested in it.

The exception is some hedge funds who are still buying gold over at the Comex as can be seen from this updated chart of the Commitment of Traders report from this afternoon. They were sizeable buyers this past week. However, this is noteworthy, the bulk of that buying was SHORT COVERING, not fresh buying. There were some 13,000 shorts covered as opposed to some 10,000 new longs instituted. It was this strong wave of short covering that took the metal up to its high made this week near $1255.

It has been downhill since Tuesday however, ( the cutoff day for the COT report) with the gold price shedding some $24 since then. I cannot say for certain as I do not have the data in front of me and will not be able to see it until next Friday, but I suspect we had some decent long side liquidation from Wednesday on. As long as the VIX sinks lower and stocks ride higher, gold will be sold by speculative interests.

Would you like to see the main driver of the gold price? Contrary to the perma gold bull camp, it is not the bullion banks but rather the big speculators; more specifically hedge funds.

Take a look at this chart using their NET POSITION and overlaying it against the price of the metal. As shown before here on this site, the price rides up and down in perfect harmony with their buying or selling.

Just for illustration purposes, here is a chart of gold over at the Comex.

As you can see from the indicator below the price graph, the market remains trendless and stuck in a choppy back and forth type of trade since holding above that former double bottom ( now triple bottom ) near $1180. Short covering and some bottom pickers managed to run the price up to the 50 day moving average before the sellers showed up and the buyers backed off from chasing it. One cannot blame them when they look over at the falling holdings in the GLD and the collapsing mining shares.

The metal has so far managed to hold above support near $1220 but is stuck below $1260. One or the other of these levels must give way to generate some more volume and bring in some excitement into the lackluster trade that is being seen in there for now. Bears would dearly love to kick the floor out below $1220 and run the metal down to test $1200 but there has been pretty good demand coming out of India for the festival season which is propping the metal up for now. Bulls know where the upside stops are lurking; they just cannot reach them however.

Speaking of new lows - the commodity sector, as illustrated by the GSCI or Goldman Sachs Commodity Index, notched a fresh new WEEKLY CLOSING LOW of 49 months!

There was a great deal of short covering in the grains this week and that component of this index helped keep the index from finishing even lower than it otherwise would have. However, grains were all weak today once more along with crude oil and its products.

Gasoline futures remain new FOUR YEAR LOWS. Once the beef finally tops out, which I still expect very soon ( today's Cattle on Feed report discussed later ) we will finally see grain prices, meat prices and fuel prices all moving lower in sync. Red meat has been the exception for reasons cited here very often the last few months but as I said back then, expect lower pork, chicken and beef prices in the 4th quarter and continuing into next year. Hallelujah for we meat lovers!

Let me shift gears just a bit ( still commodity related however ) and throw up a chart of a metal that I rarely post here. I am speaking of platinum, and of its sister metal palladium. The reason I bring these up at this time is to illustrate why silver is having problems ( note - it has nothing to do with some supposed nefarious plot by the feds to manipulate its price lower ).

Platinum and Palladium are industrial metals primarily. Yes, some buy them in the role of alternative precious metals but such demand makes up only a small percentage of their use. It is in the industrial arena that demand is generated.

What do you see when you look at these charts? If you answer: "FALLING INDUSTRIAL DEMAND DUE TO SLOW GLOBAL GROWTH", go straight to the head of the class!

Take platinum for example - the price recently made a FIVE YEAR LOW! This year alone it fell more than 15% from its starting level at one point although it briefly recovered and is now trading down only about 10-11% for the year.

Palladium fares much better than Platinum as it has a different set of fundamentals but it is currently essentially flat on the year.

Heck if I had to pick a metal to own, it would be palladium based on its rather stalwart chart, given the overall weakness plaguing the commodity sector in general.

The Dollar ended the week still stuck in the midst of its trading range from 87 - 85 basis the USDX. The Yen was initially higher overnight as equities were weak but as they recovered in the West, it gave back most of its gains. Just remember if you are trading the yen, it is essentially a currency trading the "RISK ON;  RISK OFF" trade.

I will get some more up later about the grains and the moo-moos. The Cattle on Feed report was out today and it contained no surprises that I could see. The trade estimated the numbers pretty well so I would except little reaction from the report on Monday morning. If anything, the market will trade the sharply lower beef on Friday but with the sharp selloff today, in anticipation of a less friendly report than what we have been used to seeing the last few months, any bearishness that some might see in the report is already dialed in. As I said, the beef and the cash will be key, much more so than this report, which does tell us that cattle numbers have picked up ever so slightly.

The grains? All I can say is that I am overjoyed that November soybean option expiration is over as of today! What a nightmare the antics tied to the massive amount of options written against that month contract created this week for we grain traders! First it was the 960 call writers, then the 980 call writers and finally the $10 call writers that got obliterated. The market had what I and others refer to as a "MELT UP". Simply put, there was no one on the sell side of sufficient size to absorb all of the buying generated by professional option writers who had sold a slew of calls and were forced to buy futures as the price moved past their strike level and put those calls into the money.

From a fundamental standpoint, I see nothing ( other than some harvest delays and some surprise big export numbers from China yesterday ) that could have justified a run of nearly $1.00 higher in the beans this month. That being said, short term technical always trump fundamentals. I am betting that we are going to see Chinese cancellations sooner rather than later on those bean 'sales'.

More later.... I Need a break!