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MYERS ON FUTURES
Prepared by Steven R. Myers
Cocoa First!
It seems that El Nino is affecting the production prospects of cocoa. This is the first commodity that has had it's price affected by El Nino. The supply/demand cocoa deficit is growing. The recent $2,000 upmove per contract in the price of cocoa is a tiny part of what the effects from the largest El Nino in 15 years may eventually produce. Weather markets will sometimes double in price. That would be a move more like $15,000 per contract in cocoa. Even that size of move is dwarfed by the size of some of the weather moves we have had in coffee. Some of them are more like $50,000 per contract. Most people will not participate in these moves because they are looking for a bargain market instead of the market that is moving the strongest. A market that is making the strongest move is the one that has the strongest fundamentals. It is also the one that has the most precarious fundamentals.
The cocoa fundamentals are not precarious yet, but they are getting better and better as the supply numbers keep shrinking. The technical picture is also becoming more and more positive. The 50-day moving average has been trending up some for some time. It is now gaining momentum on the upside. This is how a bull market should start and then proceed. A market that has fundamentals getting at least a little better will be trending up at least a little. Look at the 50-day moving average on any market that you are analyzing and see which way the 50-day moving average is going. It can only go three ways. Up, down, or sideways. You buy the uptrends and you sell the downtrends. It is usually best to stay out of the sideways markets until these neutral markets start a trend. It seems as though most sideways markets will turn down rather than up. These may have to do with the natural downward adjustment in prices as the natural carrying charges are erased when each month out becomes the spot month.
El Nino may be the largest fundamental for many commodities in the next year. A market does not jump from it's lowest price to it's highest price in one day. Each market will usually start a trend when it is obvious that a new fundamental is beginning to have an affect. The trend will only explode after it becomes even more obvious that there is a big change being made in the supply/demand situation. Cocoa appears to be the only market that is already displaying such a development.
There are different ways to play the long side of the cocoa market. Going long the futures or buying a call option is the two most common methods. Each has it's own benefits and drawbacks. Each is better for a different kind and size of trader.
Note To Option Sellers: This is not the time to be short the cocoa options to collect time premium from a market. You should sell out of the money call options in down or sideways markets. It is easy to see by the 50-day moving averages that cocoa is moving up!
Natural Gas
Yes, natural gas is still the leader to the upside in the energy markets. A market will usually stay the leader of a group for some time once it becomes the leader. The other energies are showing some signs of also having their normal seasonal upmove soon. The upmove should be much larger again this year in the natural gas. This is a large contract and make some huge dollar moves. Be sure and use reasonable trailing stops. This is a market that may see some up and down moves of $5,000 in a single day later this winter. Be prepared.
Grains
A grain bull market seems to already be starting in some of the grains. One should use the normal harvest pressure dip in October to try longer term positions in the corn and bean market. We are starting to see signs that bean oil will be the upside leader of the bean complex in the coming year. China is supposed to be a huge buyer of bean oil in the coming year. The market action will tell us if that is right.
The biggest grain bear market is the wheat market. The weakest market is the market to be short. It usually has the most downside potential. Long corn or beans and short wheat is a trade to consider at the harvest time for corn and beans. That is often the years low for corn and beans!
September 26, 1997Steven R. Myers
Myers On Futures Co.
P.O. Box 777, Summerfield, Florida
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