CTS Spotlight for the week of Nov. 11th, 2011: Oats

11/11/11: Fear has taken over the currency markets as every uptrend vs. the US dollar has either failed or outright reversed. US short term corporate interest rates continue to climb as the 'Ted spread' widens. The fundamental seeds for further price deterioration are being sown, is anyone listening? In the commodities markets in particular, many of the previously strong uptrends have either broken or are starting to look vulnerable. This can be especially seen in the grain markets where Oats (as a good leading indicator) has just confirmed a very bearish price patten with this week\'s price action (and is the subject of our WCTS Blog). The only exception appears to be in the meats, where both Live and Feeder Cattle look especially strong. This too though makes sense given our outlook for grain prices.

In polar opposite to last week's blog write-up, the current Oats chart is a definition of bearishness. There are so many reasons to look for prices to correct over the medium term one really doesn't know where to begin. From the fact that the 50% rule suggests prices need to come back to the 307 area; to the well defined downward pointing channel that suggest real support currently sits in the 250 area; to the gap way down at 225, there are plenty of reasons to look for lower prices in this particular grain going forward. Today I am going to comment on what I consider to be the final 'nail' in Oat's 'coffin' - that being the confirmation of a short term bear flag pole formation (with the intra-week move through the October low of 321).

From a short term traders perspective, one really loves the see tight, well defined short term price patten. It give the trader an ability to get in and out in a short period of time with very well define price targets. The breaking of 321, in my opinion, represents such an event. The failure of 321 is often refereed to as a bearish flag pole pattern (as one can see on the chart above). The price objective (284.50) is 37 cents away (at $50/pt is $1850) while the risk (to just above 345) represents about 24 points (at $50/pt is $1200). I personally would like at least a 2:1 profit/loss ratio to consider a futures trade. To that end I might look for a rally into the 330s to put the short trade on where a move to above 345 would stop me out but at a much smaller loss. Having said that, I have seen markets collapse on the confirmation of a bear flag patterns so at the very least lets watch and see what happens. Another alternative might be to consider a Put option. March, 2012 Oats (chart link) has a similar price pattern where it's bear flag target is [bear flag; 354-(398-331.5)=287.5]. Currently, the March, 2012 $300 put is 4.75 points ($250). At the target, this option will have 12.5 points ($625) of intrisic value or more than twice the price we can pay for the option today. Considering that the option has a little more than 3 months to hit the target, buying this put option to me sounds like a reasonable risk. To that end, I shall be looking into this trade in earnest in the coming week.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com

http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlight
http://www.therationalinvestor.ca