Trade Idea: Consider a November Soybean $10/$12 Call Spread.
The stock market has broken down to its lowest levels in over a decade, and everyone is wondering what comes next. On Monday, March 2, 2009, nearly every other asset was also down; even gold failed to spark. It seems investors are so risk-averse they don’t want to own anything right now. Let’s take a look at what the charts say, and when this bleeding might end.
The blue line on the March E-mini S&P 500 daily chart below is a short-term indicator, the moving average linear regression. This indicator is helpful for day-traders to pick out short-term trends, and project a potential move. To see how far the market may fall from here, we would take the prior low on November 21, 2008 at 737.25, then count the days to the to the high on January 6 high at 942.75. We are running on a 30-day cycle from low to high, and on Monday, March 2, the market broke out of this pattern substantially. This market looks like it could fall off the cliff, and my analysis projects a possible move to 531.75 over the next 60 trading days. That means the market could bottom out between now and June. But keep in mind, my analysis is “if-then” based. It’s always contingent upon an event and can quickly change as conditions change. For now, I see the bear market continuing, but a close above 751 (the weekly pivot) would help stabilize the market and I’d want to reassess the trend. I’d want to see my moving linear regression start to turn up as well. Then I’d be more convinced a turnaround is in place.
From a fundamental standpoint, the economy is in bad shape. We have a big economic report on Friday, March 6, the February employment report. According to a Bloomberg survey, non-farm payrolls are expected to fall 650,000 as the unemployment rate rises to 7.9 percent. We need the job market to improve to see the S&P stop free-falling. The mood of the market is very negative right now.
Gold
Gold’s action on Monday was a bit puzzling. I don’t understand why gold has gone down in the face of severe stock market declines. It could be the case that no one wants to take any risk in any asset class and investors are just moving into cash. I would’ve expected gold to perform a bit better, but everything on my screen was in the red on Monday, with the exception of Treasuries. My linear regression analysis is showing gold remains bearish unless we see a close above $973 an ounce. In terms of support, watch $913.40, a prior high. A close under $890 could trigger a more substantial correction. So I recommend traders stay on the short side unless this market closes above $973. Gold, in my opinion, is still in correction mode.
Consumable Commodities
I am a bit more bullish on some of the consumable commodities right now as we enter the North American growing season. Crop intentions will be very important to keep your eyes on in terms of what farmers choose to plant, and where we are at in terms of supply.
When you start trading, it’s important to determine not only how much capital you are willing to risk, but what your objectives are. Are you short-term trader, or a long-term investor? I see commodities as attractive right now for long-term buying opportunities. I like soybeans in particular because demand is likely to increase.
I recommend putting on a bull call spread. Consider the November soybean $10/$12 call spread for 25 cents, or $1,250 not including commissions.That is your defined risk on the trade. If the market rallies as I expect, the maximum potential profit potential would be $8,750., not including commissions. I think this trade represents a good risk-reward ratio. These options expire October 23, 2009.
While prices have clearly been depressed, soybeans have actually seen increased demand in spite of the overall economic downturn. Everyone has to eat, and soybeans are a diet staple around the world for humans and livestock. Looking at the chart now, I think $7.87, the December low, should hold in terms of support.
Cotton is another commodity that I think has good potential over the longer-term. The chart shows this market is in the lower band of a channel going back to 1972, and at the lower end, it’s been a good buying opportunity. I also like sugar for a long-term investor. While this market has also seen some volatility, the world consumes 160 million tons of sugar per year, and we are in the midst of a 10 million-ton deficit this year. If we aren’t producing enough to meet demand, eventually, prices have to rise.
In sum, over the next three months, I’d look at bull call spreads in soybeans, cotton and sugar. Those three commodities have the best chance of outperforming among the consumable commodities, in my opinion.
Please feel free to contact me at 800-266-0551 or via email at brobben@lind-waldock.com with any questions you might have about the markets.
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