Paragon Investments, Inc.
Tuesday, August 07, 2007
888-452-8751
Corn:
Fundamentals:
CBOT Dec corn marched 9 cents higher Tuesday to its highest close in three weeks on trader short covering and speculative buying ahead of Friday's USDA report. Corn prices have been generally on the defensive over the past month or so, as growing weather in the US was deemed largely conducive to crop development. However, with values having pulled back more than $1 per bushel from their mid-June highs, selling pressure began to wane lately as it became clear that not all of the Corn Belt was receiving the rains it needs for full yield maximization. Further, as the spread between wheat and corn prices widened to historic proportions in excess of $3.40 a bushel recently, a notable swell in substitution interest away from the multi-year high wheat market and into corn has been evident in recent days. Expectations that this would be a pattern of trade that will likely be repeated going forward also spurred buying in corn Tuesday, as well as some selling in wheat. Looking forward, additional short covering by traders positioning themselves ahead of Friday's USDA release could well give corn prices a further lift over the coming sessions. But a sustained rally over the balance of the week is unlikely, as many markets watchers remain content with their positions at this point in the growing season. Certainly, a lack of rains in the south of the Corn Belt have raised concerns about yield qualities there, and wheat's enduring strength is finally showing some lasting spillover support for corn following the recent price divergence. However, the trade is still mindful that a record sized crop is on the cards for US producers should US growing weather cooperate over the coming weeks, so a general reluctance to amass hefty long positions in corn should keep corn's overall upside price room fairly limited. With regard to Friday's release, in it the USDA will take its first stab at projecting a final production total using last month's planted acreage figure - 92.888 million - and a yield total derived from plant population counts undertaken in recent surveys. While unlikely to be accurate given how much time we have left till harvest and how widespread corn plantings have been this year, Friday's figure will still act as the market's benchmark target over the remainder of the summer, if not the year. As a result, the report could have quite a significant impact on prices - and traders' positions - if the numbers contained therein differ notably from expectations. So by and large we expect the market to begin to hunker down ahead of the report, once the ongoing spate of short covering and position tweaking passes.
Technicals:
December corn was higher, taking out last week's high to continue an uptrend channel from the July 23 low. The high-range close above the pivot point suggests a bullish bias for Wednesday. There is the potential for a gap higher open that would project an upside objective of 380.5. There are several layers of resistance to get that high. The next obvious resistance is the 40 and 50 day moving averages in the 360-365 area. The upper Bollinger Band is right there too. Today's gains took prices above the top of the uptrend channel, suggesting some consolidation is in order. Support is 340 and resistance 351 for that channel. Directionals are trending higher to favor the buy side.
Speculative Positions:
8-7-07: Bought 1 December Corn at $3.52 - risk a close under 3.35 ½.
Hedge Positions:
3-9-07: Bought December $4.00 Puts $.25 3/4
Soybeans:
Fundamental:
Soybean futures Tuesday nosed higher in line with corn as drier than anticipated conditions in the southern Midwest growing region raised concerns about the bean crop's final yield potential. Nov soybeans closed 12 ¾ cents higher, while Dec soymeal and soyoil futures also closed higher on the day in tow. Overall the beans remain primarily weather-driven as the US crop is still in the midst of its crucial developmental stage. As a result, any signs of persistent dryness in key growing areas will continue to support prices. However, positioning ahead of Friday's report is expected to play an increasingly important role as the week wears on, and could make for some fairly choppy price action over the coming sessions. Price-wise Nov soybeans have been entrenched within a $8.35-8.65 per bushel channel for the past several trading days, and further consolidation within that band looks likely over the near term. Any charge to the upside would draw the $8.70, $8.73 and $8.80 levels into view as viable targets, while any breaks below $8.35 would target $8.30 and $8.25. On the product front Dec soymeal prices advanced $5.70 a short ton to $233.60 a ton as speculators beefed up positions that bet on soymeal gaining more interest as a feeding option as wheat prices hold near historic highs. Further gains look likely going forward as long as the beans remain on the offensive as well. Bean oil futures were also higher on the day, but lagged behind meal and the beans as crude oil's recent setback still weighed on market sentiment.
Technicals:
November soybeans were higher on Tuesday. The high-range close above the pivot point suggests a bullish bias for Wednesday's trade. The gains were still within the recent trading range that offers support around 833 and resistance around 867. Resistance can also be defined as the 50-day moving average of 865.6. Directionals are trending higher to favor the buy side. A breakout of the recent consolidation range, would suggest about a 30 point mover, offering targets of about 900 to the upside and to about 800 on the downside. Some are looking for a rally up to the 895-900 area to put in the right shoulder of a potential head-and-shoulders top (downside objective of 700). The bulls are still expecting the upward trend to continue after having just put in an ABC correction. A 138% retracement of the recent decline gives an upside objective of just below 1000. A buy strategy was initiated at 850, initially carrying a protective stop of 830 that may have been raised as last week's low was 840. The initial objective on the spec long is 890.
Speculative Positions:
7-31-07: Bought 2 Nov Soybean at 858.25 - risk a close under 841.00
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
CBOT Dec wheat eased 1 cent a bushel Tuesday as the recent buying spree that lifted prices to historic highs lately cooled off. The market actually opened on the offensive, but lacked the staying power as traders moved to scale back on positions ahead of Friday's USDA report. Some short wheat / long corn spread placements also weighed on wheat Tuesday as speculators moved to position themselves in case further demand substitution away from wheat and towards corn takes place going forward. News that Egypt had opted to purchase 145,000 metric tons of Russian wheat this morning - and not US wheat - also lent on US wheat values Tuesday. Overall, however, the day's softness was more a factor of a pause in the recent buying interest rather than any sudden surge in selling pressure, and we can't rule out any fresh bursts of buying should news of another batch of US wheat purchases emerge overnight. But, the temptation to build on short wheat/ long corn spreads will remain high for many traders now that the spread between the two has reached historic highs to render wheat feeding almost wholly uneconomical relative to corn. So wheat prices may continue to face something of a headwind going higher over the near term, especially if no reports of sales of US wheat emerge over the near term. Looking forward, the trade will remain primarily focused on the scale of wheat demand around the world, especially since the world's wheat producers have struggled to amass decent sized crops for the past several months. With that in mind, special attention will be paid to the state of the crop in Australia, the next major producer to grow a crop, as current dry conditions there raise worries that the emerging crop may struggle to develop fully. With regard to Friday's report, the average analyst estimate for 2007-08 U.S. all-wheat production is 2.129 billion bushels, down slightly from the USDA's July estimate of 2.138 billion, according to a Dow Jones Newswires survey. In 2006, all wheat production was 1.812 billion. All wheat carryout is estimates to come in at 402 million bushels.
Technicals:
December wheat was slightly lower on Tuesday, but new contract highs were made. That means there is a reversal top showing on the chart. The last three of those didn't last for more than two or three sessions before seeing higher ground, so it may not attract as much selling as one would first think. Directionals are showing an overbought condition that could attract selling. Resistance is expected at today's high of 689.5. Support is the June high of 658, which was previous resistance. An uptrend line drawn off the April-June highs has some bulls shooting for a test of that line above 700. The breakout above the top of the June-July consolidation range suggested a target of 690, tested today and perhaps close enough to attract profit taking from longs.
Recommendations:
NONE
Speculative:
NONE
Livestock:
Live cattle futures were sharply lower on Tuesday. The front three contracts suffered triple-digit losses amid concerns prompted by the larger deliveries and the weak technical picture presented with this sell off after last Wednesday's contract high reversal top. Long liquidation was the likely feature, meaning that open interest should be down hard. The weak close suggests follow-through selling tomorrow, with the potential for gap lower opens. Today's gap on the October contract already projects a downside objective of 95.15, which looks a lot more realistic this afternoon as the late weakness fell through the July support in the area of 96.20 and through the 40-day moving average of 95.97. The selling finally abated just above the 100-day moving average of 95.79. The 96.00 area was expected to be an area to reconsider long strategies per the long-term bullish mentality. The sell off has already made a more than 50% retracement of the late-June-July rally. However, heavy deliveries were not expected, suggesting there may be some fundamental weakness not expected, and the lower technical objectives could trigger additional fund selling as they liquidate long positions. This latter aspect would suggest not jumping on the long side too soon. It all suggests a lot of volatility, especially if a stopper steps forward for the deliveries. The delivery number doesn't post until 4:30pm now because of the electronic trade still going on.
Feeder cattle futures were sharply lower. Triple-digit losses were the norm with the Sep through Nov contracts seeing gains in excess of 200 points. The sharply lower cattle futures and strong gains in the corn market prompted concerns that feeder cattle demand would turn soft. Yesterday's gains in the feeder cattle index and today's losses in futures now have futures showing a discount to the cash. This should slow additional sell pressure. Feeder cattle futures closed on its lows, suggesting follow-through selling tomorrow. There is the potential for a gap lower open, which may encourage additional selling. September's close was below the expected support in the 114.50 area. Next support looks to be the May high of 113.85, with major moving averages offering support each 50 cents to $1 lower (113.34, 112.64, and 111.46).
Lean hog futures were widely mixed on Tuesday. August was higher again as this contract tries to figure where the cash market will be at expiration next Tuesday. The upward push was attributed to the sharply higher cash hog prices so far this week and ideas that heat stress this week will keep packers having to bid aggressively for hogs. Packers had no problems getting hogs for today, with the slaughter estimated at 405,000 head and the week-to-date figure up 3% from last year. If pork prices don't get a boost soon, hog prices could go down quickly too. The next three futures contracts suffered triple digit losses, attributed to fund selling, buy stops, and less-than-expected sales of pork to China. Considering the size of the move, volume was relatively light suggesting that the trade was largely one sided, likely due to long liquidation. Open interest is expected to show another big decline. The weak close in futures suggests follow-through selling on Wednesday. There is the potential for a gap lower open, which would suggest a downside objective of 67.20 (which would still be a couple of dollars higher than October prices last year). However, considering the $5 drop in October futures over the last two days, there will be interest in short covering that could initiate a bounce.
Milk futures were sharply higher. Higher cheese prices prompted the bullish mentality. Hot temperatures may stress livestock to hurt production, which may be fueling some of the buying. The move higher triggered buy stops as resistance areas were breached, accelerating the move to the upside.
Positions:
8-07-07: Sold 1 December Live Cattle on a close below 98.72. Risk a close above 100.35
