| September 5, 2007
“Things do what they do until they do not do them anymore” as I stated in some articles in my website.
For whatever the reasons of a situation that causes markets to go down quickly (break) or rally to contract or new all time highs, have some things in common such as, they will overdo the price that is realistic, logical, or sustainable.
The reality of a market going down is that it has a finite price, zero. You can structure a money management strategy based on the parameter of one side of the market, going down to zero. If you were to buy a commodity, it cannot go lower than zero or worthless, so risk is easier to define than a market going up.
The market going up to new highs present hazards that are unforeseeable. Trying to sell this situation without a strategy for risk control could be disaster, as well as buying, because of the high volatility. The biggest hazard of trading futures is managing risk. What you perceive to be too high a price for something might be true, and lets say 2 weeks later proves you right, the problem lies in the fact that the market could keep going higher way past your thoughts of how high the market could go and facing to put more money in your trade or forced to exit to control your losses. It does not matter what you think about the market being “crazy”, when you are wrong, you WILL lose more money in a trade if it gets “crazier”. The market does not care about what you think, as a matter of fact, your thoughts is in your position and the market is always listening. When there are more buyers than sellers or the buyers are willing to pay higher a price than the last, that will move the market up and the opposite will move the market down.
What is it worth? Markets do not have to make sense, trade reasonably, or logically. Trading for 31 years has forced me to not only be a student, but an observer. All my observations of the past show me that markets will react the same way with the same conditions. In commodities, when you have little supply, and good demand, price is no object. Great demand I find will fuel a rally, more than a supply shortage rally. When you have both conditions present, it goes the way of the astronaut, strap yourself in.
What I try to do is use option strategies to have a known risk and when the market becomes chaotic, I am calm. I have a plan if right to take partial profits and let the other part ride. This is where “feel and judgment” comes in. I cannot explain exactly what it is, but like love, a gut feeling that you have based on everything learned, conscious and unconscious.
Example in real time using WHEAT TO NEW “ALL TIME HIGHS”.
Now comes (to my pleasure) the great wheat rally of 2007. You have read my articles since I started reporting two weeks, about the grain market, with wheat being in the forefront. You have read about the tight supply, and growing strong worldwide demand, a powerful combination. I could talk about the fundamentals and what the price should be valued at, but that really is the “value” and not helpful except to measure how far the market is from where you think the “value” is. I could walk you through and talk about the charts in the wheat, but that is another article and more. What I think is when a market stops having a relationship to a well established spread or ratio, it exactly trades like that, with NO relation. In this wheat market, a factor of the wheat is a feed grain (high in protein, can only be used in certain animals in limited amounts) that can substitute as a feed grain for corn, which has a close feed grain relationship (easy to switch feed to the same animals) with soybean meal. When prices are balanced between the three no matter how high, or low the price, which allows for rational feed grain choices based on the most profitable way to feed at that time until a cheaper switch comes along.
This is NOT the market we are in. When people talk to me about wheat/corn spreads now, I look at this as NOT a spread at all. I think corn and beans can TRY to coat tail (follow) the wheat market and ride a little. For corn and beans the uses and relations between the two remain intact, and even those two have changed in the last 5 years since they became “energy futures, not grain futures markets.
I know you want my thoughts about how high the wheat can go. When I look at the December Wheat 07, I see them going to $8.50 near term, and then every 50 cents higher will be new highs, $9, $9.50, $10.00 (The Buck), and so on with $1.00 weekly trading ranges. I think the market could come down to test the buck $8 or $7.60 between now and next week, and the uptrend stays intact. Now we have new all time highs and the market has just begun. This is a futures market and if the future of the wheat crops from down under start to look less than expected, and they are starting to, look out! Wheat prices $'s over soybeans. I guess I did live long enough to see it. If is a very big word, but if the major grain producers have a weather problem for a year, yet alone two, what will people pay for food?
I could go sci-fi, in two years of bad crops worldwide, the world has a fight for food and like oil, food becomes a powerful commodity. Remember history shows that feeding your people is a good way to keep your people under control, and the government or rulers to stay in power. The Romans lost sight of many things, but sending back ships to Egypt that were loaded with grain, to fill the ships with sand to replace the blood soaked sand at Circus Maximus was a mistake indeed. The Russians have learned that lesson, because right now they are selling wheat reserve stocks to quell rising bread prices. At what point does China trade some of the dollars for all the wheat in the world? I am just concerned what the market will do today, but it is food for thought, and tasty too.
I am viewing this wheat market as the crude oil market, going through $50 for the first time on the way to $78, back to $50 and now back to the $70’s. No matter how high the wheat goes, in some point in the future, it will start a downtrend and find support and then another uptrend to retest the old highs. Why do I compare? Because when gasoline went to $3 a gallon for the first time, it was all over the news everywhere for a long time and now closer to $4 and it is old news. Why? Because when people need or want something and they have the money, they will pay no matter what, if they do not have money, then choices need to be made, and when price gets too high, people stop buying, demand is less resulting in more supply, that leads to more supply than thought and lower prices follow.
In today’s world there is money for everything, hahaha come on, are you telling me you are not going to buy a loaf of bread because the price goes up a dollar? In Chicago they sell cigarettes for $8 a pack (all taxes) and in the suburbs 10 miles away from the city lines it is $3.50, they still pay $8 do they not?
Complain about what you want, but Price is just a measure of supply and demand.
The first thing people do from countries that have improving economies is to buy oilseeds and food. Food, food, food! This is why wheat has such upside potential. Bread, noodles, cakes, cookies, come on!
If the world has any mishaps from here on, the price of this or any other feed grain with the same fundamentals will explode to highs like the way crude oil preformed.
I believe the long term trend for grains is up, but downtrends will occur and money could be made on the downside as well.
Traders love these markets because it will be volatile for some time and that presents opportunity to the trader. Many of the new kids on the street are not ready for the swings to come, and not ready in their strategies and money management to take advantage of the market. They are almost exploited in the fact that margin requirements are not a money management tool, they are the margin, and most people think they can “afford” the trade, but in reality they cannot and lose more than they thought possible, especially when the market opens limit bid. They are not prepared for losing money so quickly; how did I lose that, it can’t do that, it is not worth that, but the bottom line is they lost more than they thought possible. What they should have thought about is what is possible, and learned for themselves first, or from someone like me to teach you so you do not find yourself shamefully uttering the words “if I only knew”.
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