April 6, 2020
THE NEW NORMAL, LET’S LOOK AT HOGS
During a trip to China I discussed market analysis with a group of young Chinese traders. They noted that my work relied heavily on technical tools. One of the traders asked me what did I see as the weakness in technical analysis and I responded that eventually it will be wrong. I explained that in my opinion no matter the commodity there would eventually be a market shocking fundamental occurrence that would force technicians to adjust. I think most would agree that Covid-19 has done exactly that. With most Americans agreeing to follow Stay at Home orders we experiencing a major change in our economy and in practically all of our commodity futures markets. We need to adjust at least for the foreseeable future to a NEW NORMAL.
To help you better understand my opinions please be mindful of the following.
• While I do not use the RSI to determine when a market is overbought or oversold I do refer to it because it is the one index I believe most traders are familiar with.
• It is my belief that a commodity will spend sixty per cent of the time within the First Standard Deviation of the long term average. Secondly in my opinion it will spend about 30% of the time above the Second Stand Deviation and finally around 5% give or take above the Third Standard Deviation.
• As the Standard Deviations expand above the Third Standard Deviation they can become historically overstretched at that time they reach either Negative Equivalency or Positive Equivalency. This is normally a sign to counter trend trade.
• In extreme (rare) bullish or bearish situation both the negative and positive indicators can reach over stretched at the same time. This is the situation with Hogs and the reason I have chosen to examine the Hog market.
So let us journey into the world of pork. What do we know about June Hogs?
We know that the June Hog market is in a dramatic long term down trend. If you receive my weekend letter “Trends and Reversals” you know that it will take a close this Friday (all my work is based on Friday closes) at or above $104.40 to reverse the trend to bullish, OUCH. You also know that as of Friday’s close the Negative Indicator is at a record high of over seven Standard Deviations above the long term average. You may also know that the Positive Indicator in an extremely bearish market is nine Standard Deviations above the long term average. WOW! So what does this all mean?
In normal times it would be a big invitation to counter trend buy, in fact in normal times the time to start buying would have been last week. But we are talking about the NEW NORMAL. So what to do? Well like I have said before, I am not just a pretty face. I have skin in the game and went long a couple contracts last week (pray for me). If I am right I obviously pulled the trigger a little too early, and if I am wrong we have yet to determine NEW NORMAL. As for you if you decide to trade any of these markets you have to be willing to accept a far greater degree of risk then in the old normal. You should also be looking to for greater profits than the old normal.
What is NEW NORMAL, we going to find out together.
My name is Lee Gaus and if you would like to see more of our thoughts go to our website ifgfutures.com. There you will also find articles written by my partners Tom Fritz, Steve Erdman. If you have any questions you can reach me at 1-877-304-1369, 312-384-1166, or email me atlee@efggrp.com. If there is a commodity you would like me to address shoot me an email.
There is significant risk involved in trading futures and/or options on futures. Futures and/or options of futures trading may not be suitable for all investors. Investors should consider these risks and evaluate their suitability based on their financial conditions. Past performance is not indicative of future results.