Maybe it’s just because I live in the Midwest, but somehow when I think of the word “commodity”, I think of soybeans and corn, and yes, occasionally wheat. Maybe it’s just a byproduct of all of those mind numbing drives through the heart of Illinois with nothing – and when I say nothing, I mean "nothing" – but row after row after god forsaken row of corn lining the expressway (by the way, how do they get those rows to be so perfectly straight? A leading cause of highway hypnosis here in Illinois to be sure). Or maybe it’s because I can remember all those times when it would rain on LaSalle Street in Chicago – and nowhere else in Illinois – and soybeans would sell off as a result.
Sure, some might argue that “pork bellies” is even more of a “commodities commodity” than beans or corn. But let’s face it, pork bellies are gross and I’m pretty sure there are only like two guys still trading “bellies.” (It’s rumored that one day, trader A is the buyer and trader B is the seller, the next day they switch. So my advice is to just stay away from those guys).
So as we kick off summer let’s take a look at a potential play for the month of June.
Soybean Seasonality through the Year
Figure 1 displays an annual seasonal chart for soybeans futures. As you can see, historically, beans show strength from late January into early July. From there, sell offs have a way of unfolding between mid July and early August and again from early September into early October.
Figure 1 – Annual Seasonal Trend for Soybean futures
Of course, please note that these are “tendencies”, not certainties. One other “tendency” that is highlighted with a red arrow in Figure 1 is that beans often stage “one last rally” during late May into mid to late June. The potential for this to happen this time around is buttressed somewhat by the latest weekly and daily Elliott Wave counts. Which leads us directly to......
Soybeans and the Elliott Wave
If you are not familiar with Elliott Wave theory let me boil it down as succinctly as possible: everything (particular it is thought, security prices) moves in five waves – three up waves with two intervening down waves, which are then followed by three down waves with two intervening up waves. Doesn’t get much easier (or more arcane, depending on one's point of view) than that does it? Of course, there is the minor matter of determining when one wave has ended and the next wave has begun. But let’s not get bogged down in detail here. Let’s simply sum up with:
Jay’s Trading Maxim #306a: The Elliott Wave count can be an extremely valuable market timing tool. Especially when it works.
Jay Trading Maxim #306b: If you want to know how useful Elliott Wave theory is, just go and ask any Elliott Wave theoretician (but maybe bring a sandwich because you might be there a while).
Me personally, I like Elliott Wave but I probably do not qualify as a “true believer.” I look at it more as a confirming tool than as the be all, end all of timing signals. For example, if the weekly EW count and the daily EW count are both bullish and the seasonal trend is also bullish that tends to get my attention. In a situation like that I might look for a limited dollar risk trade that can make money if the security in question rises. Like for example, November soybeans.
The top clip in Figure 2 displays the weekly bar chart for November 2012 soybeans with the weekly Elliott Wave count (presently suggesting a bullish Wave 4 Buy). The bottom clip in Figure 2 displays the daily bar chart for November 2012 soybeans with the weekly Elliott Wave count (presently suggesting a bullish Wave 4 Buy).
Figure 2 – November Soybeans (Weekly on Top, Daily on Bottom)
So at the moment, we have:
-A slightly bullish seasonal trend between now and June 21st
-A bullish weekly Elliott Wave count
-A bullish daily Elliott Wave count
-On a shorter-term basis November beans are bouncing off of an oversold level
So maybe this particular configuration “floats your boat” and maybe it doesn’t. In any event, the next critical step is to find a trade to take advantage of this situation.
The most straightforward approach would be to buy a November soybeans futures contract.
-If you bought one contract at 1294 and prices rose to the daily EW projected price of 1436, you would make $7,100 (142 point x $50 a point).
-If you bought one contract and placed a stop-loss below the recent low, at say 1250, you would lose -$2,200 if you get stopped out at that price.
Here is an alternative:
-Buy 1 November 128 call
-Sell 1 November 158 call
This position is depicted in Figures 3 and 4.
Figure 3 – November Soybean bull call spread
Figure 4 – November Soybean bull call spread
This position costs $3,388 to enter. However, this trade will presumably be exited either:
a) If price falls to 1250, OR
b) On or shortly after 6/21
Under these position management guidelines, the most one would likely lose would be just under -$1,000. On the upside, a move by November beans to 1437 would generate a profit of roughly $3,200.
When it comes to trading there are essentially three steps to success:
1) Spot an opportunity
2) Find a trade to take advantage of said opportunity
3) Manage the trade (let profits, run, cut losses, adjust option positions, etc.)
Of course, the irritating paradox of trading is that even if you do all three of the above there is always the chance that the pesky security that you have chosen to trade will move in the wrong direction and you will end up losing money. So as with anything else, the fact that soybeans appear to be poised to rally, there is no guarantee that they actually will.
So once again, I feel compelled to invoke:
Jay’s Trading Maxim #5: The markets don’t always do what you want them to do.
Sorry about that.
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
Interested in covered call writing? Log onto www.MoneySteps.com for a free trial. Course videos by Tom Gentile and Monday/Wednesday/Thursday Case Study updates by Jay Kaeppel.