The March oat futures contract is providing us with a classic, “Chicken vs. the Egg” situation. The issue comes down to whether the commercial traders drive the seasonal patterns or, the seasonal patterns drive the commercial traders. The March oat futures contract is the first grain market to keep an eye on, seasonally speaking. Commercial traders have taken off about 5,000 of their short contracts. This is a huge number in a market with less than 10,000 contracts in open interest.
The setup for the trade times the March oat futures seasonality as the market softens through the end of January before rallying in February and into expiration. Does this mean we’re early for the long side of this trade? Should the trader sit back and wait until February to buy oats regardless of price? The advantage of following the commercial traders is that their actions often times tip the market’s hand due to the specific knowledge they have within their own sphere of business. In this case, growing and buying oats.
Long hedgers needing to lock in future supplies were aggressive buyers into year’s end. Their actions turned our commercial momentum indicator positive in December. Furthermore, the recent sell-off in March oats has created the type of oversold situation that we like to see prior to entering a long position. Simply put, speculative traders like us don’t have the risk appetite in time or, Dollars of the commercial hedgers. Therefore, only taking trades when the market becomes stretched against the commercial traders’ momentum allows us to minimize the risk while also catching the initial jump in expected prices.
Based on the above information and these annotated charts, we’re looking to buy March oats around $3.10 on a buy stop. We want the market to begin moving higher and get us in on the way up. If the market trades below our projected stop price of yesterday’s low at $3.02, we will cancel the buy stop and skip the trade. If the entry order is filled, we’ll use the $3.02 level as our protective sell stop. If profitable, we could ride this trade for quite some time.
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