sugar | Margin Rich

It’s Like the Old Days in Commodities

Posted on July 23, 2016 by Margin Rich

For the traders out there, action in commodities has been highly volatile presenting opportunities as if it was the 80’s. Basic technical analysis has been rather effective, especially within the softs and agriculturals. Now the precious metals swell appears to be breaking, if only to regroup for the next move

It’s important to remember that large-scale traders and high-frequency traders are the beginning, middle, and end when it comes to trading. Not only do they control breakouts and breakdowns, but they often make the market, too. It’s important to exercise patience before positioning into a play. Before a larger breakout or breakdown is firmly established, there can be see-sawing volatility that can jar traders out of position. Patience allows you to skip a few waves before finding that swell you decide to ride.

What’s been hotter than the precious metals or related investments in 2016? Not a whole heckuva lot, and silver has been on mad recent run but price action says it’s time for a pause. The price of silver has already started turning over the last two weeks. Because of the intrinsic volatility in the metal, it could be a quick ride down to the breakout point around $17.75. I think this breakout in the precious metals is the real deal and I suspect we could see a sort of V-bounce right back up to the two-year highs once the breakout point is retested.

One of the calls I made in my last post was that sugar was looking blow-offy. I wasn’t precise on the timing but clearly the action is looking corrective. More importantly, the price action has been controlled to squeeze final long-profits and allow positions to be lightened.

I think sugar’s action could go one of two ways. One, it could be like in the chart above where we see a downmove and then a bounce where final profits are taken and it gets sold off pretty hard down to a natural support point. Or the market-controlling speculators could just sell the sweet stuff down in a hard, volatile move. My gut tells me the first option is the probable play. If you haven’t positioned for a sugar short, there’s still time.

Trading intense moves in an asset class is a lot like trying to catch a metro train. You may have missed it going away on a long, but you can always catch it when it comes back on a short.

I don’t know nor can I explain why basic resistance/support chart analysis has been working so effectively since late 2015. Maybe it’s the patience. Maybe I’ve learned to read the action with HFT-tinted glasses before executing. I don’t know. All I know is that I don’t feel like I’m doing a whole lot different from most other years, but 2016 has been one for my own trading record book. Who knows? Maybe that whole 10,000 hours thing actually means something.

Let’s take a final look at bonds. They’ve been driven up right along stocks. In a bizarro turn, American equities are being viewed with virtually the same risk premium as corporate bonds and even treasuries, primarily because of solid credit ratings coinciding with high relative yields and developed-world central bank backing.

However, the boat is awfully crowded on the one side of interest rate direction. The world has negative rates everywhere. The crowd thinks there’s no way rates can move upwards just because the central banks are not in a position to act. That is fallacious logic. Observe:

Remember, the Fed’s final QE announcement in 2012. You see that upmove in 10-year rates? That was a market-driven move, not Fed-driven. And yet money is allocated today as if there ain’t no way the market can drive rates up again in any sort of treasury selloff. There is a widely held belief that American debt is one of the only pure safe havens, and it is to an extent. That doesn’t mean that market controllers won’t inflict maximum pain for bettors letting their guard down.

We’ve already seen a sharp move up in rates recently. Is there more to come? I’d bet that the odds favor a continued, but possibly choppy ascent in interest rates. This provides logical plays shorting TLT.

It’s not just developed sovereign debt that has seen a run. Corporate debt has been plowed into as well. Trading the exuberance on US corporate debt is as easy as some puts on LQD. Have a look at the upward spike since Brexit:

LQD is already beginning to turn. It may not fall down to support but hedging within a structured option play is well documented and easy to execute.

For my few followers out there, don’t give up on me. I’ve been extremely busy with very little personal time. I hope to post more regularly in H2 of 2016. Have fun out there with your money. Just don’t blow it.

When Last We Was Trading…

Posted on June 4, 2016 by Margin Rich

…I’d shared some thoughts on trading volatility and the action of the S&P 500. I was right about the down-move in the S&P 500. I thought a small move was possible of no more than 5% and a 3% percent move down is what we got, then a continuance of the sideways consolidation. However, I was very wrong about volatility. I suspect the reason is because the trade was simply too crowded. Volatility became a trade du jour as the intense bounce that had started in February had obviously grown long in the tooth.

But crowded trades are a trading fool’s errand and my thesis was wrong. And so ended one of the greatest 6-month runs I’ve ever had in reading the tape, but now I’ll just have to start fresh on a new run of prognostications. The crowded trade of long volatility and short the S&P 500 was skewered by the “market making” bot shops. Even Mr. Bonds himself, Gundlach, came out and stated during a Reuters interview that from the 20th of May and on the action in the stock markets felt like a short squeeze. JPM backed that assessment as one of the largest broker dealers out there. Observe a chart they released verifying the quick spike at the end of May in short covering.

As this short-covering burst has squeezed a chunk of the volatility hedging, too, we still very well may get a correction of 5%ish down to just below 2,000 on the S&P 500. Volatility is still worth watching for a quick scalp if enough weak hands have been washed out and the robots let some negative momentum push the S&P 500 down and volatility up.

Let’s return to the soft commodities market as sugar has just been on a silly tear. Observe:

Just look at the last week, specifically. Talk about momentum ignition. The Commercial Hedgers have gone supremely short but this softy keeps ripping higher, moving 16% in the last week. Crazy. But the last two trading days look suspiciously like blow-offs. Have a look at what’s happened during the last two blow-offs in sugar over the past 9 months.

You can see that prior to each of the blow-offs there were frenzied gains in very short time periods, but then astute traders could have made a nice rip quickly shorting sugar for 2 to 4 weeks. Has another opportunity presented itself for one of those rips? It sure looks like it. Go elsewhere for your farm reports, international weather patterns, crop output, regional flood potential, yada, yada, yada. This is straight up tape reading.

Using the futures proxy ETF of SGG, it is clear to see that $36 is an important number for sugar. Magnetic almost.

Using Fibonacci from the August 2015 low to the current June high, $36 also happens to be the 38.2% retracement point on the weekly chart. Tread lightly, if you’re inclined, as the action in sugar has been fast and furious. Just look at that whipsawing action since the start of 2015. Hedge. Trade with discipline. Manage the position.

One final note from a macroeconomic standpoint, have a look at this chart of negative yield curves in Germany and Japan.

If this doesn’t scream insanity to you then nothing can phase you. Maybe all the developed world’s central bankers have been secretly, partially lobotomized. A little frontal lobe here, a little hippocampus there, and you have a compliant banker with the inability to remember what negative rates actually mean and the lack of cognition to act effectively. Germany and Japan combined equal approximately two-thirds of the US economy. Which means their economies matter. A lot. Germany has negative yields out to a decade and Japan out to 14 years, just screaming recession is near if not already present in those two countries. You think the US is in better shape economically because we don’t have negative yields? These are different and unique times, folks. The kind of times that are remembered with head shaking and derisive snorts by future students of the economic past. Trade smart. Build cash. Stay disciplined. New highs are coming, but new lows are closer than you think.