usda report results
Looks like the
numbers released for Friday, June 30th by the USDA are relatively neutral, but we'll see if the market thinks so. Cotton might see a dip since acres came in higher than the average trade guess. The report was slightly friendly to beans and benign for corn.
markets before usda report
The strength in corn is giving some credibility to the argument of the bulls that corn has a long way to go on the upside should ending stocks be lower than expected or if weather turns hot and dry during the key July time window for pollination. The market managed to break out of that 2.48-2.52 trading window, which tells me that those people buying into the report saw the breakout as an indicator for the possible bullish knee-jerk reaction on Friday.
On the flipside (there's always a flipside, isn't there?!), they may fall on their face buying into the report. I haven't ever been one to initiate a position in anticipation of a report that no one has a clue about; however, I have
added to an existing position that had already accrued profits. Those who bought through the night (and a lot of traders did) may be in for a really nice 10-15c gain today, but if forecasts are relatively benign going into July and the report doesn't contain estimates that deviate too far from the average trade guess then Friday's action could amount to very little. Only time will tell. In the meantime, I'm always watching for an opportunity to snatch some out-of-the-money options should a market start to feel overextended.
usda report for friday, june 30
The big USDA report comes out Friday morning. This is the one the market has been waiting for. Everyone has an opinion, but no one knows for sure. It could be a shocker if the quartly stocks for corn are different than expected. All you can do is position yourself ahead of a report like this and have a contingency plan.
Sugar is looking like it may be finding some good support.
Beans may have some life in them for the upcoming growing season. At least some people are predicting some midwest dryness coming during the key time windows for soybean yield determination. I can tell you that in my neck of the woods, previously forecasted rain has been removed from the forecast for now and it feels hot, hot, hot... but that's not to say we couldn't be drenched by the end of the weekend.
We'll have a better idea of wheat yields after tomorrow, too. Look for some fireworks here.
The decline in cattle (both live and feeder) that you could just feel was near happened today. My approach is to look for strength in these markets and pursue an options strategy based on their movements in the coming days.
It should be interesting tomorrow... the March 31 report was the last market-shocking report (May 12 being a relative non-event).
trading site links
This is a work in progress post to the blog. I thought it might not be a bad idea to start compiling (and hopefully organizing) the trading related links I've accumulated.
http://futures.tradingcharts.com/marketquotes/
http://www2.barchart.com/mktcom.asp?code=BSTK§ion=grains
These sites are good sources for free futures charts. I use the first one primarily because it's faster to navigate, but when I really take time to study a chart, I use the second site because the charts can more easily be enlarged to examine the details.
http://www.iptv.org/mtom/
Market to Market is a show aired in Iowa geared toward grain and livestock producers.
http://www.agweb.com/
Agriculture website that has general farm news. They have a valuable newsletter available called ProFarmer that has some fundamental and technical news about the markets. Their primary purpose is to serve as an agricultural advising service with the goal of helping producers market their crops at the highest prices.
http://news.tradingcharts.com/futures/
General futures news site.
http://www.will.uiuc.edu/am/agriculture/default.htm
Radio program website that often has valuable market commentary.
http://www.farmdoc.uiuc.edu/
Great source of farming trends and studies.
http://www.cftc.gov/cftc/cftccotreports.htm
Commitments of Traders Reports that show what the different groups of traders are doing in the markets.
stochastics - brief explanation
This is an excerpt from an email to a friend regarding stochastics...
The way I understand stochastics, you're looking for divergence between the fast-moving line (K) and the slower-moving line (D) -or- when there is an intersection of the two lines. So, for example, you're watching for a spike in momentum that would cause the fast-moving K to cross the slower-moving D and continue accellerating in that direction... thus giving a buy/sell signal.
There is a weighting assigned to the fast-mover and the slow-mover in the formula and a number called the "raw stochastic value" is also factored in. (I had to look that one up.) Here's how it's all computed:
raw stochastic value = ((Close - Low10) / (High10 - Low10)) * 100
where:
close=lastest closing price
low10=lowest low from last 10 trading sessions
high10=highest high from last 10 trading sessions
If you think about the formula, it's basically the quotient of:
the difference of today's close and the lowest low from the last 10 days
divided by:
the range of the highest high and lowest low from the last 10 days
multiplied by 100, which gives you a percentage.
The percentage tells us how the differential of today's close relative to the 10 day low compares with the entire range (from high to low) that has occurred in the last 10 days. So, in other words, how does today's trading activity compare to the price range fluctuation in the last 10 days... and a percentage is given.
For example, if corn traded in a range from 2.50 to 2.60 in the last 10 trading days and we're on the 10th day and corn closed at 2.52, then the math is as follows
raw stochastic = [(2.52 - 2.50) / (2.60 - 2.50)] * 100 = 20%
The %D and %K are computed using the raw stochastic as well as previous %D and %K values (so it's a recursive formula in nature). The way I've seen %D and %K given is smothed using a 3-day moving average. That formula goes:
%K = 2/3 last %K + 1/3 raw stochastic
%D = 2/3 last %D + 1/3 new %K
So the raw stochastic computed above is used to find %K, which is the faster moving line and the %K is used to compute %D, which is the slower moving line. To make sense of the values is very much like the RSI in that over 70 is overbought and less than 30 is oversold.
What I take away from the chart is that corn is oversold right now (from stochastics) and we're bumping into a support level that began at the low in Dec-05. If support is violated, then January's flat support will be tested and next would be the December low.
Hopefully that helps. I've seen different intervals of time used for the calculation of the raw stochastic, but the math is the same.
late june corn retreat
Well the drift downward in corn is still underway. It'll be interesting to see how things pan out with the balance of the growing season. Historically, we're likely to have one rally in corn but that's obviously not a given. With the consistent pattern as of late of weather premium being removed from the corn market, I'm seriously beginning to question if perhaps too much of that premium has been factored out. It seems like a lot of the downward pressure we've seen lately is due almost as much to the loss of popularity of commodities since the cooling off of gold and crude as it is to the ideal growing conditions thus far. As many will repeat to themselves while holding longs "there's still a lot of growing season left."
True, but the odds are shifting to the bears for the seasonal drift lower to be sooner rather than later. I'd personally like to be around for any readditions of weather premium to the corn market, but the December contract is now getting close to that key 249 price area. Drifting much below that barrier would almost certainly cause some degree of a tailspin and massive long liquidation. Though... it may very well turn out that we are in the midst of a perfect buying opportunity. The market will likely be reluctant to break that key support barrier... of course there are never any guarantees. One thing is for sure, this market presents an interesting opportunity for entry into a potential weather market on the long side with the ability to set a tight stop below key support.
The Friday, June 30 numbers will likely be market movers (even if the market ends up in the same place it started).
options primer - part 1
This is an excerpt from an email sent to a friend about getting started with trading options (from late May '06)...
So here is the main idea: buying an option on a future allows you to limit your risk potential to the price you pay for the option. Buying a "call" option is like going "long" the futures market. Buying a "put" option is like going "short" the futures market. There are few variables associated with the valuation of the options. The two important variables are time and the "strike price." You'll hear the saying that there is a "time value" associated with an option. That means that the option only has value for a specified amount of time and after that time it is worthless, which is where the saying "most options expire worthless" comes from. The idea is to liquidate the option before expiration and get more back than what you paid.
The "strike price" is one of the terms of the contract you enter when buying an option. Say, for example, you believe the price of gold will go up to $1000 before the end of the year. The strike price for the option you're looking for would be $1000. That's not how much you have to pay for the option, it's just what you are predicting the value of the underlying commodity (in this case gold) will go up to before the end of the year. Right now since the December futures contract for gold is trading at about $670 per ounce (5/25/06), the probability of gold going to $1000 before the end of the year is relatively low. This probability is the factor which determines the price you actually pay for the option. The lower the probability that gold will reach $1000 by the end of the year, the lower the price will be for the option.
Like I said earlier, when you anticipate price appreciation of the underlying commodity, you purchase a "call" option. So the verbage goes like this: buy a December gold call option with a strike of $1000. Some people prefer a different order of the words, but the meaning is the same. The strike price is $1000, you are purchasing a call option, and the option is for the month of December. As I'm writing this email, the cost of purchasing this exact call option is $270. This price is determined, again, by the probability of the market approaching that price level in the specified time horizon. Now here's the really interesting part: the value of the future never has to actually reach the strike price ($1000 in this case), it just has to continue approaching it. The other variable is time. As the time window between now and December becomes smaller, so does the probability for the strike price being achieved.
I hope this has made sense so far. Here's an example of a trade I recently made.
On April 21 I purchased call options for June gold with a strike of $700. The price I paid for each of these options was $160. At the time I purchased them, I believe June gold was trading at around $600. The reason for the relatively low price of $160 is due to the fairly low probability of the June gold futures contract reaching $700 before the expiration of the call option. I purchased the calls because I believed there was a good chance gold would continue its rise. Gold did continue to rise... and at a very fast clip. Before long the price of gold was at $680 then $690 and, finally, $700. At that point in time, the value of each of the call options was $1700. I liquidated at that price on May 3 (I believe). In my opinion, the beauty of this approach to trading is twofold. First, you limit your maximum loss exposure to what you pay for the option at the beginning. In the case of my example, the price of $160 per call option is the maximum loss I could possibly be subjected two. Second, although you may not get the magnitude of return you can get with some futures trades, you can get a much higher percentage return with options. My net return for the gold trade was $1540 ($1700-$160) per option, which is not necessarily a difficult magnitude to achieve with futures, but the 963% return rate is very difficult to achieve with futures. Not only that, but with futures contracts you're subjected to potentially unlimited losses (which can obviously be minimized with the use of stops, but even then there's no guarantee of your exact exit point).
futures trading entry point
A favorite approach of mine in trading outright futures (instead of options) is to wait on a short-term correction in a market that challenges support or resistence levels. I like to buy at or just above support levels and place the stop just below. This tight stop placement minimizes risk, but gets a trader in the market at the bottom of the trading channel, which can oftentimes offer significant upside potential. Of course, this is most "comfortable" in a market that has a longer term trend intact without a history of a successful challenge of that level--anything to stack the odds in favor of the longer-term trend staying intact. While this method doesn't put a clean cap on risk, it's about as good as it gets when trading outright futures.
Some traders like to wait a on a confirmation of a "breakout" in order to enter a position. In my experience this approach can work just as well, but it can make trading choppy markets more frustrating. If you have a market that is churning back and forth over an extended period (building momentum) and one day you have a breakout, this will pull a lot of traders in the market that are speculating on a continuation of the breakout in the same direction. The problem with this is that choppy markets seem to oftentimes be plauged wth "false breakouts." Of course all of this depends on the trader's individual risk tolerance and personal preference for the more reassuring trade, but if a market is chopping I like to swing trade the channel by purchasing near the bottom of the channel (when it's challenged). When trading with this approach, I generally stay on the side of the market that is in line with what I perceive the longer-term trend to be. For instance, if the longer term trend that has remained intact over four months in corn is bullish, then I wait for a buying opportunity near the lower part of the channel, hold the position as it works higher in the channel and set a relatively tight stop so that I don't forfeit the opportunity to maintain the position should it have a breakout to the upside, but I also preserve capital if it's just another wave in the churning cycle.
Another important consideration is the seasonality of markets. The corn example above is oversimplified to illustrate the channel trade, but there are definitely some other factors to keep in mind. If the market is churning before a key period in the growing season, a trader may want to consider being a little more generous with their stop placement. There may be some violent swings, but being right about the longer-term trend in a market that is poised for a large move (higher or lower)...
evolution of trading methodology
Over the last few months, my trading habits have taken a turn for the more conservative. Fortunately, this turn wasn't due to a bad loss in the markets, but rather I've been experimenting more and more with the use of options.
Ideally, I would like to participate in the futures markets no matter what's going on in my life. If I'm out of town I don't want to feel like I have to check the computer or call the brokerage house for price quotes every day (not that I wouldn't anyway--being a hobbyist and all), but still I don't want to feel
obligated. So the idea of using stops to limit (to a large extent) the potential for catastrophic losses is always a great idea--there are limitations though. Some markets require more patience than others and sometimes there will be a high potential trade without a nearby support or resistance level for effective stop placement. In cases like this, I like to evaluate the prices of options on the futures contract I wish to trade.
A recent example of this is the lean hog market. As of late, we've seen a pretty steep run-up in the price of August lean hogs. Anything that goes up so quickly usually has a pretty nasty correction to the downside. If there is a total reversal, then that price action to the downside generally happens at an accelerated pace (markets that go up fast fall even faster). No matter what your opinion about markets like this, there is definitely an opportunity that is presented in some cases through the use of options.
If a trader anticipates a correction to the downside in a market that has enjoyed a steep upward trend, then shopping for an inexpensive put option is a great way to limit one's risk exposure, while at the same time stepping in front of a freight train. The beauty of this approach to purchasing options is that as the freight train is rumbling along and gaining momentum, the prices of the put options below the market become more affordable.
While this method of trading generally won't yield as high of a return on a dollar-for-dollar basis, I have experienced a higher percentage return on initial investment with this strategy. This affords the trader an opportunity to hit more base hits and leave open the possibility for a home run without exposing yourself to unlimited risk by trading the outright futures. Over time, consistent base hits add up to make for pretty impressive overall returns.
In the hog market mentioned above, I purchased put options on the August lean hog contract for $600 each on 6/19 and each one already has a market value of over $1000 as of 6/24. That $400 return may not seem like a lot to those that have hit home runs trading futures, but that's a 67% return on the initial $600 outlay. Not only that, but you have a capped risk of $600 per option should your
contrarian thinking approach backfire.
r e l a t i v e // strength begins
So I'm going to experiment with this method of retaining a trading history. It may not be the most effective method, but it's worth a shot. I currently log all trades in a workbook that I designed. It allows me to monitor my daily trades, make comments, and assess the risk of other potential trades. I outline my entry and exit strategies as well as my risk tolerance. I doubt that I'll be posting any charts here, but I suppose that depends on the functionality of this blog. I'm hopeful that some of my trading partners will take time to post comments here that will make us all more thoughtful traders.
The primary purpose of this online effort is to keep a track record of my trade sentiment. I've noticed that I'm less likely to make emotionally charged trading decisions when I take the time to articulate thoughts into written words. The required pause allows for a more thoroughly developed plan. Also, having a log of one's activity provides at least some semblance of accountability. In reviewing my track record over the past few months, I can honestly say that I've avoided making the same mistake a number of times because I've used the "history is a good predictor of the future" principle to talk myself out of a questionable trade.
One point that I'm often reminded of is that no matter how exciting or potentially profitable a trade is at any given time, there is
always another market that will come along and offer just as much opportunity to a trader. Sometimes standing on the sidelines for a while to wait for that opportunity is the best "trading" a person can do.
