June 3, 2019
Our in house model attempts to tell us when the price movement of a commodity has reached a point (what we call accelerated energy) when short term retracements increase in likelihood. This does not mean that the trend is apt to change but only that the trade has become so imbalanced as to need a correction in order to resume the dominate trend of that market. Last week’s market action was critical in reversing the trend of several commodities while reaffirming the already established trends of others. We will examine two commodities that have utilized a measurable degree of accelerated energy and deserve examination.
COFFEE- If you have read my contributions in the past there is a good chance you knew that according to our in house model should July Coffee have closed at or above $96.65 last Friday (May 31) the trend would reverse to bullish. July Coffee did indeed confirm a bullish trend reversal with a close at $104.60. It will need a close at or below $78.40 to reverse back to bearish this Friday. I think you would agree that is not likely. It is worthy of noting that the trend turning $11.30 rally Friday to Friday used up a great deal of accelerated energy pushing the positive indicator up to the third standard deviation above of the 197 week average.
What to do? Over the last 197 weeks the positive indicator for Coffee has exceeded the third standard deviation only four times…… but when is has, the price move has been very significant. Ergo it is my opinion one should look at for setbacks to get long. I cannot recommend against buying Coffee at present levels but understand additional risk involved. Our long term in house model also confirms that over the next four weeks while a possible trend reversal to bearish is not impossible it will be difficult.
CORN-Wow is about the only thing that can describe the Corn market. In warp speed it went from having too much corn to the market finally acknowledging the wet field conditions and continued rain. The trade is now lousy with rumors, and projections ranging from a loss of 10 million acres to huge cuts in yield. Ergo we have seen a seventy- five cent rally in July Corn over the last three weeks. It is my opinion that if some of these rumors are correct Corn could go a good bit higher yet, but it might need a short term correction on the way.
What do we know? July Corn is in an uptrend. It will take a close at or below $2.94 this Friday to reverse the trend, not likely. Corn has used so much accelerated energy that July corn is six standard deviations above the 197 week average. This imbalance in the positive indicator has created a negative equivalency. What this means is that the accelerated energy has been so strong that the negative indicator rather than remaining within the first standard deviation of the 197 week average it is creating a wider distance between itself and the positive indicator. This only happens in markets that are in a very strong trend and have a tendency to get quickly over or under valued.
What to do? I would be very cautious about buying corn at present values. I would even consider a short term short position on rallies. Do not get me wrong the trend is higher and I recommending being long, but not at these values. I want to see a profit taking dip and a more balanced market. If you are long or do indeed to buy this market at present levels give serious thought to where you want to put a protective stop.
The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.