08/20/10: The dog says of August are heavily upon us as we head towards Labour Day. A cautionary note, the last weeks of August often see very low volumes as many professional traders are away. Please don't be fooled into thinking that low volume price action can't be reversed very quickly in early September (as is often the case). Having said that, little movement has been seen this week in the currencies other than the Swiss Franc. Stock markets continue their malaise as bond prices get pushed higher on a daily basis. While many commodity markets have moved higher of late, some are looking a little 'toppy'. This week we see OJ breaking down as little or no Hurricane news may take the fear premium out of this market. Please refer to this weeks CTS Blog Spotlight for more on this trade idea.
Frozen Concentrated Orange Juice
This market is all about one work....Hurricanes....if there are a lot of them, expect OJ prices to be high. If there are few, expect prices to fall. So far this summer has seen a very quiet hurricane season and the charts seem to be pricing in the event - or non event in this case. Regardless, our time tested 50% rule, coupled with the classic Dow double tops suggests that there is a short trade here and potentially a very profitable one at that.
The chart above left shows the weekly price action in OJ for the past 18 months. Notice the tighter and tighter move higher. The predominant trend line that followed the move higher has just recently been broken. Not only has that trend line been broken, but the market put in a nice double top right at the break. One can easily see that prices are going to have a hard time getting back above the uptrend line and I would argue that what once was support (on the way up) shall now become significant resistance going forward.
The chart above right shows the monthly price action in OJ for the past 7 years. Notice here the dramatic fall (from '07 to '09) and the almost text book 50% retracement of that fall (from '09 to '10). Now that the market is no longer overbought or oversold, one can't help but consider the longer term trendline implications here. First off, a further rally from here seems to be quite unlikely and more importantly, real support on a monthly basis for OJ current sits at or near .70! This is a very risky market to be long...
So if a top is in, where might this market pull back to?
Our good old 50% rule shall help us here. Again, referring to the chart on the left above, we see that a simple 50% retracement of the massive move higher shall bring prices back into the 110 area (where we add the high plus the low and divide the result by two). Additionally, the real weekly support for this market exists near the trend-line from the major lows of the spring and summer of 2009 (ie. 100 to 110).
Putting these two pieces of information together, we can see that a move back into the 100 area isn't unrealistic, the question now - is it profitable to consider the trade?
List below are the two heaviest open interest option contracts for the March, 2011 OJ futures contract.
Considering that both of these options will have an intrinsic value well over double their current price (should we get a move back to the 50% level) I would have no trouble buying either. I will go for the 120 Puts simply because at 3.3:
1. I'm only risking $500 per contract so if the trade fails I'm not going to take too big of a hit.
2. By spending $500 per contract, I can justify buying two (total of $1000 invested) and then if the trade succeeds, I can sell 1 very quickly at a double and ride the remaining one to the trade's ultimate fruition.
Just remember,
1. don't risk more than 5% of your stake on any one investment idea.
2. the bulls make money, the bears make money....the pigs get slaughtered (so don't be greedy! If the position doubles, take it and be happy)
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com
