Several commodity markets are poised for well-defined up-trends this year. I plan to write about these markets on a regular basis as the views presented here are more thematic and longer term in nature. Updates to the trading strategies published here will be provided on an ongoing basis. In this issue, I will be focusing Coffee and Corn.
This week we have a big decision at the G20 summit between China and the US. The US China Tariff will be the focus and can the US and China manage to come to an agreement? A global recession can unfold if we see another 25% tariff increase on the remaining Chinese goods. This would certainly put pressure on the Chinese economy let alone the remainder of the world. Both countries have been getting ready for a no deal situation as the US has been seeking out rare earth producing countries and China has been planning more stimulus.
No trade deal this week with China and another increase of 25% has been promised by Trump. There are major implications across the globe if we see a trade war and another 25% tariff increase. First expect CNY to be very bearish, we will have risk of a global recession and downside risk to most economies. Chinese markets would be bearish and would likely test the 2015 lows. In the US, expect a slow down, cyclicals would be bearish. Small caps should see a bear market in this environment.
Please see the past issues of the Commodity Advisory Newsletter for more information on the China Tariff situation and commodities covered here on The Art of Chart.
Strength in the Brazilian Real has supported Coffee prices recently. September Coffee has put in a low around $90 and has rallied from a short squeeze of large spec players. They have covered their short positions by about 50% since that low and the market is back above the 100 DMA which is bullish.
Global consumption is expected to rise 4 million bags to roughly 168 million while production is pegged by the USDA to drop some 5 million bags due to the short fall of production in Brazil. This should result in a more balanced supply demand picture verses the recent large surplus.
Looking at the charts, there is a decent setup here with a retest into the weekly pivot at $100 and a chance at a rally into 106 as a first target higher. Chances are the retest into the 7-11 window will lead to a press higher into the longer term declining resistance trend line. So hold weekly pivot this Monday and look at a potential long for for at least $6. The retest should give us a second bite at the apple.
I want to give myself some time on this trade and am considering an entry in the September contract. Consider buying September Coffee at 99.75 and risk $3.00 from your entry with an objective of $109.50 or consider a simple call spread in September Coffee buying the 102.50 call and selling the 112.50 call. Risk no more that $3 on the spread.
The Corn market is going to have lower acreage and yield this year. We have the possibility of seeing $6 per bushel Corn by year end. As of the June 16th planting progress report, there are 7.4 million acres un-planted and with protect plant insurance that number could be higher into roughly 10 million acres. I have discussed this at length with subscribers on The Daily Update and I am expecting yield to be the lowest seen in many years. The University of Illinois is expecting 166 bushels per acre and it could be as low as 153. If this is the case, the USDA forecast will need to be adjusted DOWN some 30 million bushels. The next crop report in July should clarify the un-planted acreage and help project a more accurate yield for the year.
The commitment of trader report from the CFTC shows fund traders were net long 112,212 contracts up some 23,000 contract from last week. Fund buying is supportive to prices continuing to climb.
Looking at the chart, we have a decent setup for the next step higher. Support at $440 should send prices into the July 10th high window. The last swing low needs to hold as support. I am expecting this years crop post season to continue to climb into year end.
I want a longer dated position on Corn and longer term exposure so consider buying the December Corn contract at $453 and risk the trade to 438. Look for an objective of at least $500. You could also consider a risk reversal on December Corn long the 500 call and sell the 440 put for a net credit of about $4.00. Risk the $4.00 credit on the trade.
The trading strategy review below has a summary of trades based on the Commodity Newsletter and also The Weekly Call. These trades are posted on our private twitter feed and further discussed each week on The Weekly Call which can be found HERE.
I will continue to cover thematic trades in the commodity world in this newsletter and will continue to update the trading strategies below. My next newsletter will be in two weeks and will likely focus on the Soft sector. Until then, Trade Smart and Trade Safe.
Trading Strategy Review
The trading strategies below represent positions taken by this newsletter and shorter term positions covered by The Weekly Call. See the Weekly Call for the latest updates to these positions.
Disclaimer: Trading futures contracts and commodity options involves substantial risk of loss, and may not be appropriate for all investors. By reading this report, you acknowledge and accept that all trading decisions are your sole responsibility. Trading strategies referenced in this document are only suggestions, no representation is being made that they will achieve profits or losses. Past performance is no guarantee of future results.