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How Far Will this Leg in the Soybeans Continue Before Completion?

Essentially, on long 38 call options which we purchased at 60 points, those options have pushed up towards 300. If we hit up toward the 43 level those options will return approximately 10:1 return. I point that out because any time you have the options it’s the last 3.00 in this case.

You move from 30 to 40, that’s great. You’re seeing a good rate of return but the next $3.00 is where the multiples really kick in. The information we’re giving subscribers is very critical right now with respect to the termination point of this projected leg up.

Reviewing our research I don’t have anything that tells us that a final top for this leg should be in place at this point in time. It’s not to say that it can’t but the probabilities are very low, perhaps a 90% probability we have further to go to the upside, $3.00 further to go to the upside in the soybean oil and that means further upside in the soybeans.

I want to show you the charts and the forecast that we have and give you some very critical perspective with regard to the law of action and reaction. I’ll talk to you about that in a minute.

With regard to the soybean advance, this commodity forecast was based upon the closest fit advances in history; the closest precedents that matched this price curve.
They key one being the 1949 which is the 60-year cycle. In looking at our recent high of 1141 as of Wednesday, this advance has pushed up to what would be a minimum objective based upon the 1978 precedent. You can see that we would have quite a bit further to go if we were to replicate the 1949 precedent.

The cash soybeans gives us a different perspective, and I believe it’s more valid in terms of our forecast. During 1949, 1974, 1977, and 2005 precedents the advances off the comparable bear market lows to our December 5th low retrace the following percentages of the preceding bear market declines. The comparable bear market decline in 1949, the advance which followed retraced 65% of this decline. In 1974, 63%, in 1977, 66%, in 1975, 63%, and you can see that was the most modest in terms of price objectives. Also, the 1976 precedent I’ve added, that was 59% retracement because that was a very key precedent as it relates to the soybean oil and that would project at 1266½. We have these four precedents with the time frame of the advances are all very close, within a month of one another, projecting to approximately from the 1260 level up to the 1320 level.

Commodity Forecasting Methods – Action and Reaction

The Law of Action and Reaction. The action is the move to the downside. The reaction is the violent rally, a reaction to the oversold condition. We have a very high probability that this market has farther to go to the upside.

As you can see, thus far we’ve pushed to as high as 11, 11½. We have significantly further room to the upside based upon the 2005 precedent and even beyond that based upon these precedents.We’re really in a fascinating position having essentially purchased our long positions in the soybean oil very, very close to the March lows.

The previous chart was cash and in looking at the July futures contract the overall advance in the soybeans has been 36%, 34% in the bean oil, and 38% in the soybean meal. The meal continues to lead the complex higher.We have a breakaway decline which occurred in the July futures contract on the break of the 1150 low so there’s going to be some buy stops building above that breakdown low. You can see that after that low is broken the market should have declined into the final bear market low.

We’re approaching what was the breakaway point at 1150. There is going to be some buy stops there and that should be very interesting.

Also, in terms of monitoring this market and keeping our hands on the pulse, if we decline as much as 10.2% off any high we will overbalance the two minor corrections of 8.4% and 8.5%. We’ve had two minor corrections in a very aggressive runaway market, both of which were identical. The market time period on those was five and six days.

Off the current high at 1141, let’s assume that the market experiences a decline off this high. A 10.2% decline off that high would result in a decline of 1024¾, so if we dropped down into this region here that would be our first indication that the runaway configuration had been broken. That doesn’t mean that we turn into a bear market. It doesn’t mean that we would sell short, but it certainly means, depending upon where we are in our long futures and our long call option positions, that would have an impact on our thinking in terms of taking profits.

The other side of the equation, if we experience a decline exceeding six days we would overbalance time. When you overbalance either price or time, in other words you experience, in this case the biggest decline we’ve seen since March 2nd, that would indicate that the selling has been better than the buying for the first time since March 2nd and that is an indication that the market can be changing, at least over the intermediate term.

Commodity Market Observations – Soybean Oil

What we see in terms of legs up in bull markets, we are in a second leg up in a bull market and you can see the first leg up a December low, a correction, second legs having broken the January 7th high confirmed that we were in a second leg up.

What we had placed on the charts sometime back in early April was our forecast based on average legs up in history, so what we find is the median leg up in every leg since 1949 in the soybean oil had been three months, twenty-three days. That is where this diamond is here and that’s why this relates to this. That would be in the early second week of July that we would project a median move to the upside.

Also, only 8 of 46, or 17% of the legs up in history were less than one month and twenty-three days. As of May 9th we have crossed that one month and twenty-three day threshold. We find that 23 of 46 legs up in history, 50% of all the legs up in history, lasted between two months and three days which is as of May 18th, and four months and twenty-four days which is as of approximately the second week of August.

Fifty percent of all the legs up in soybean oil fall within this time band here. We enter that time band as of May 18th and that tells us that when you see a market move up like this, the further down the road you get and the more mature that leg gets the higher the probabilities become for a high being established; a final high in that current leg up.
Now we are very much on point as far as watching the market very closely. We want to realize as much profit as possible and also move our stops up as need be. We’re monitoring the situation very closely.

What we also find in history in terms of legs up, the median percentage advance was 46%. We’ve advanced 34% in the soybean oil thus far. The median advance, in other words right in the middle of all of the advances in history, was 46%.

A 46% advance off the 2966 low basis the nearest futures would project to 4330. If we advance to that price level, the July 38 calls purchased at 60? would be in the money by 530 points and this would result in at least an 8:1 risk reward payoff.

We wrote this back in April 8th, back when the price was down here anticipating that the market would continue higher. Now we’ve pushed up as high as 4020 basis the July futures contract and if we push up to 43 which would be right in here and not too much further to go, at least relative to the move so far, those options are going to reward at least 8:1. If we continue higher from there the risk reward can become higher.

Commodity Trading Strategies – Current Soybean Option Positions

We are aggressively long for subscribers, 150% long in fact. That’s just on the options side of the equation and we do have the latitude to make partial profits but I’ve made no recommendation to do so yet.

There is a pivot at 4310. In the July soybean oil you can see that there was a low at 45, 46 on the way down. Our low was 4310 basis the nearest futures. Basis the July soybeans we noted that it was 1150. Those are important price points that technicians will be watching to see if the market can regain those lows.

We have a minor intermediate low which occurred on the way down at 4310. I believe this is a reasonable objective to the upside and coincides very closely with our original objectives for this leg up. We have an additional rationale for why this market has the potential to move higher and regain that 4310 as a minimum objective to the upside. One note here, I am cognizant of the impact a dramatic and now a projected correction in the stock market could have on the commodity market board.

I’ve made subscribers aware of this as well. Obviously when there have been these violent moves in the stock market it has had an impact on the commodity board. Also, the commodity board has had an impact on the stock market because they’ve been moving in tandem.What occurred in the soybean oil back in December is that the market established a higher bottom coincident essentially with the stock market experiencing its final bear market low.

One of the reasons that we turned so bullish in the soybean oil is that the market did not move to a new low in spite of the stock market and all the fear and panic and deflation that was taking place in equity prices.Nevertheless, by virtue of this very aggressive move in this leg up in the stock market, there will be a correction at some point in time. I am cognizant of the impact that could have in stalling out a soybean advance.

I have not projected a top for this move in the stock market. I don’t know that I’ll even be able to do that with respect to my analytical tools with respect to that, but I am cognizant of that possibility. That is, in a sense, a wrench in the works that must be at least acknowledged.

Commodity Analysis – July Soybean Oil

Lastly, in the July soybean oil, everything is tracking very well. You can see that we exceeded the January 7th high only by about $2.00 so far. It’s not like we’ve had a dramatic break out above this January high.In a previous video we had gone through these projections based upon our historic precedents showing that the advance of the January high should be at least an 18% advance above that high. Let me give you that number. That’s an important calculation and that would take us up to 45 and that was something of a minimum forecast as well.

That would stall out having exceeded that January high by just $2.00 doesn’t make any sense to me. We also have a minor pivot that occurred here which was a buy signal. No outstanding pivots till we get to the 45, 46 level. It does get very interesting.

You can see how far we have come from the ’08 high and it’s going to be very interesting to see how high this advance can carry price. Essentially a bull market in and of itself and I would expect it to fall short of retracing this entire bear market by a long shot as we saw in the soybeans the retracement on average was about 60%. That does give us room to the upside in the soybean oil as well.There is no telling what can happen. We are, in my estimation, in a bull market in overall commodity prices and they are all starting to play the game together but it can be somewhat of a choppy affair depending on what markets that you’re in, but we have targeted the soybean complex as the key complex.

The next number of days is going to be very interesting to see if the continued runaway of the soybeans continues and I will update you with regard to tracking these forecasts.

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We have been able to get a jump on this market in terms of participating in the current opportunity via futures and options. This video will fill you in with regard to the historic context in which this market is trading, based on our research.

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Current Research and Forecast for Soybeans and Soybean Oil Futures

The recent move down in soybeans was one of the greatest legs down in the history in the soybeans since 1936. There are five other markets over that course of time, approximately 70 years, which had similar price implosions to the one we’ve seen recently in our market.

The current action in Soybeans very much rhymes with history and what took place during those five implosions.   I want to go through some of the observations that I have with respect to what is taking place now.

First of all, I believe the prospects are very high that the December 2008 low did complete a bear market. We experienced a first leg up into the January 12th high and a secondary decline. We also experienced a bull market correction into the March 2nd low. From there we have seen the market push up to as high as approximately 1011, as of Wednesday, April 8th.

Soybean Market 1019 February High

So, we’re not far from the 1019 February high. The high for the move in the pit session on Wednesday April 8 was 1046 ½, so we’re knocking on the door to the possibility of confirming the overall bull market.

Of the five “closest fit” precedents, only the 1975 market continued lower in a continued bear market. In other words, after we experienced these implosions, historically, four out of the five started bull markets after that, and only one of the five continued lower and that was the 1975 market. In other words, in four precedents we were on the bull side of the market cycle at this point in time.

I really like our prospects on the long side of the soybean complex. We are all ready positioned in these markets so I’m not suggesting you just jump in there at this point, but you are going to be able to follow along with respect to what is taking place.

The closest fit, I believe, is the 1977-1978 market.

In three of the four bull market precedents (1977-1978.1949, 1978, and 2005 ), the three I have displayed in the chart (see video), followed almost the exact angle of ascents. So there are actually three angles that are advancing side-by-side. That’s very interesting.

In other words, the DNA in our market closely represents three of the five historic precedents. Once the comparable low to March 2nd was established, the legs up were almost exact in terms of velocity of advance – overall percentage advance per day which we say is the angle of ascent.

This is very interesting and would suggest that the soybeans could very well follow this angle of ascent. If that’s true then we’re a little bit overbought here. That also occurred when we first hit 981 ¼. We retraced back to this leg.

Can we see some backing and filling? Certainly we can, but all of these three were bull market legs.

In looking at the soybean cash, the 1977-78 market (see chart in the video) is the closest fit.

Let’s look at how this played out in ’77. There was a huge implosion in price, almost exactly the same percentage decline as our market. This was followed by an initial flurry to the upside lasting one month and eight days. The recent advance in Soybeans was one month and four days.

The backing and filling demonstrated by the 1977-’78 bull market correction was rather modest. We’ve experienced a backing and filling in our market, and then we started the next leg up and it’s very possible that we could parrot this 1977-78 market which continued into a bull market.

Live Trade in Soybean Oil for Current Subscribers

Soybean oil is the market that Gann Global Market Forecasting Service Subscribers are positioned in. We’re long the July call options in the soybean oil long the 34, 36, and 38 for subscribers, long the 38s for an average of 60 points.

Those options have gone from an average entry price of 60 to the close today (April at 120. So we’ve almost doubled those options in price. Obviously this market moving up very aggressively as the soybeans are.

Historic Market Forecasting Benchmarks

Let’s go through a couple of the historic benchmarks for what to expect during a leg up in the soybean oil.

Our assumption is this implosion completed the bear market first leg up secondary correction, and that we are in the midst of what will be a second leg up in a bull market. This would be confirmed by a rally over the January 7th high, so we have a ways to go there.

We closed at 3499 today, Wednesday, April 8th so we’re still about 250 points away from that high.

If this is a second leg up in a bull market, the current advance into the April 6th high is very young. The low from March 16th to the April 6th current high is 26 days. At 26 days it ranks as the 46th shortest out of 47 legs up since futures trading began in 1951.

If this is a bull leg you would not expect it to be complete in just 26 days, so presumably we are early on in this leg up. That is, if we’re correct that the trend is up and this is a leg up in a bull market.

As far as the time period of legs, this is what history tells us with respect to that. The medium leg up is three months and 23 days. When you look at the 46 legs up in history, the mid-point of those 46 legs, or average, is three months and 23 days.

(See chart in the video) The diamond point represents three months and 23 days from the low. The average leg up in a bull market would move from March 16th until approximately the second week of July.

This isn’t a projection in terms of price. Our projections are actually incorporated in two closest fits, and we have blanked that out (see chart in video) for this complimentary video…subscribers would receive the projections.

We know, based on time, a typical leg up in Soybean Oil lasts three months and 23 days so that is a good benchmark for us.

Our July call options expire on May 16th. That’s not too far off of what would be the average leg up. That obviously plays in on options where you need to have enough time in terms of what we purchased to hold those long call options positions.

Additional information: only eight of 46, that’s 17% of the legs up in history in soybeans were one month and 23 days or less. We’re only in the 26th day and only 17% were complete in one month and 23 days.

Twenty-three of 46 lasted between two months and three days to four months and 24 days. We show that up here in this bar. We start here towards the middle of May and go until about the end of the first week of August, and that means that half of all the bull market legs in history in soybean oil would be complete in the time band shown in the video.

We expect Soybean Oil to continue higher into the middle of May. That means we have plenty of time to see up that upside and the probabilities would favor more upside if this is a leg up.

This is a very comforting benchmark.  We are in the early stages of what should be a leg up in a bull market, and we want subscribers to our Forecasting Services to be patient in holding long positions at this point in time.”

In terms of percentage moves during legs up, the median percentage advance was 46%. As we look at all 46 advances, the median advance is 46% percent and 46% off 2966, which is the low here, would project a 4330, so somewhere in this vicinity.

As far as the closest fits, it remains to be seen if we follow the 1976, 1978, or neither precedent. This is the 1976 precedent here, and this is the 1978 precedent here. I don’t have the culmination prices and dates on the chart (see video). That’s reserved for our subscribers, but those are precedents are being studied by our research team very closely.

The ’78 precedent was much more modest and would project a modest 2:1 risk reward on our 38 July call options, whereas the ’76 we could see upwards of an 11:1 risk reward in our call options and that is if we don’t do anything else from this point in time.

Subscribers are situated very nicely, I believe, to profit. The only question is, to what extent that profit will be.

In looking at the soybean oil, this was the 1976-77 precedent (see chart in video). There was a minor spike off the lows into March 9th, backing and filling, and then the market surging higher into what would be a July 14th high in the market.

We’re looking at these patterns; this DNA, in our market, matching them against history; the psychology, the technical analysis, the patterns, and the formations, all play into forecasting this market.

The Soybeans and the Soybean oil are tracking each other very closely in terms of percentage advances, although the soybeans is showing a little bit more strength. It’s good that both of these markets are advancing basically in tandem. They both have advanced about 18%.

Undoubtedly a significant number of buy stops are building above the 1024 high. It will be interesting to see what happens once these stops are hit.

We fully expect that the buy stops are going to hit above 1024. Those people on the short side of the market are obviously very much on the defensive and on the run.

The crop report that came out this last week-and-a-half has caused a surge up in price. The major landmark high is at 1069. It is going to be a interesting if we exceed that high.

Obviously there can be some backing and filling. We don’t expect Soybean Oil to go straight up. It can rally above the 1024 and then experience a correction beneath the 1024 before resuming the uptrend.

In addition, we see the shorts are obviously being pushed to the wall, covering short positions. The follow through in trade action is going to give us our next bit of information and evidence as to just how strong a position the soybean complex is in.

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Stock Market Evidence: Bull Market or Bear Market Rally

We’re going to look at both sides of the equation from a relatively neutral posture, weighing the evidence as to whether we have a final low in place or whether this is potentially a bear market rally.

First of all, I’m looking at the nearest futures contract. This is the chart, basically a working copy of the chart. On a percentage retracement basis, we have exceeded the greatest percentage retracements during the Great Depression. We have done so over a very short period of time.  Only the June 1930 rally unfolded as quickly as ours. We’re pretty close to the November of 1931 rally, so obviously it’s within the realm of possibility that this could be a bear market rally high based upon time. I don’t have a problem with that. In the video, I show a table displaying the actual percentage rallies of the greatest legs up in history.

I believe the retracement of the previous leg down, is the most important part of our analysis in this situation, based upon the law of action and reaction. In this case, the Acti0n would be the decline, and the Reaction would be a percentage of the previous action down. We have exceeded the greatest retracements during the Great Depression. That is an interesting point that we have to be aware of, and the market may be showing that it’s divorcing itself from the DNA of the Great Depression. I had presented that working, or potential assumption in our previous couple of updates.

From March 6th to April 2nd, the S&P rallied 27 percent in 27 days. Needless to say, that’s a big-time advance, retracing 65 percent of the decline. This ranks at number two out of 52 bear market rallies in history. If this were a bear market rally, in terms of the velocity of the advance, it would rank as the second greatest in history.

In the video, I show the greatest velocity legs up in history.

For example, after the crash of 1929, we experienced a leg of 47 percent off the lows in four months and 28 days. The rate of gain would have been a .32 (percent per day). Our advance has been .99, almost three times the rate of gain during the first bear market rally in 1929. While we fell 20 percent short of the overall percentage advance, we did so in an extremely compressed time period.

The bear market rally in 1929, while it was the greatest percentage bear market rally in history, it only ranked as the 15th greatest, in terms of rate of gain. The velocity of the current rally, if it’s a bear market rally, is right up there with the greatest, the most elite of the advances.

Amongst the four closest fit bear market rallies to ours, the 25-day rally in 1931 ranked as the greatest. The second greatest was in 1931, one month and four days, 31 (percent per day). Ours has advanced a little bit more violently than that. This was a .87; ours is a .99. Then we had a couple of others here, .83, that actually occurred during the bear market in 2002. Number four was the rally which we experienced between November of 2008 and January of 2009. We actually advanced 27 percent into that January high, which is exactly our advance.

We do have to take note that there is historic precedent for a bear market rally to be very short-lived like this. Does this mean that this could be a bear market rally? It can. If I set a ledger up and say, “Well, these are the factors which argue for a bear market rally on the left side, and these are the factors which argue for a final low on the right side,” I’d have to say that there are factors on both sides of the equation, so we look to see more and more evidence way towards one potential outcome or the other. That’s where I am right now. I’m ready to maintain a flexible, neutral outlook, but I’d mention some of the things that would appear to evidence that a final low could be in place.

Historic Analysis of Violent Bear Market Rallies

In great bear markets like this, you can have a bear market rally, which experiences a violent advance in a short time period.

This is a completed leg up in a bear market. It is second only to the rally into the June 27th, 1931 high in terms of velocity. It’s extremely overbought. If this is a bear market rally, probabilities would favor that we have a high in place.

Two of the top four velocity advances occurred during the Great Depression, one during our bear market, and one during the 2002 bear. So we do have precedent during the Great Depression. Two of the advances had the same DNA as ours, so we have to make note of that.

Finally, if this is a bear market rally, there is compelling arguement in the four closest-fit precedents for the market to reverse lower from here. The stock market has advanced 27 days as of April 2nd. Now we’re out to April 6th as of today, so we’re 31 days into this potential bear market advance, this leg up in a bear market. Well with the four closest fits, the longest time period was one month and 16 days, three were one month and four, 25, and 29 days.

If you are looking for a place to enter a short position, if you are bearish the stock market, then this, presumably, would provide you with some evidence that this thing has the potential of turning around very quickly and moving down.

After the 1931 advance, we actually experienced the final leg down during the Great Depression into June of 1932. The stock market dropped 62 percent in one leg. If we were to replicate that leg, we’d go from 847 down to the lower 300 level. If we replicate the October of 1931 precedent, a very violent leg as well, on a percentage basis  that would carry us below 500.

In 2002, you can see that that leg down actually culminated. The reason is  that was a final bear market low in October of 2002. In other words, once there is a culmination, a final low, that means that now it’s a green light for expecting a bull market.

October of 1931, that was a leg down in an overall bear market, which was followed by a leg up in an overall bear market, and a continuation of the bear. In March of 2009, we don’t know how that’s going to resolve itself. We don’t know yet whether this is a final low in a bear market, or whether that is simply an intermediate low prior to a bear market rally.

Participating in the Stock Market

While the percentage declines and time periods of the declines experience great variation, the velocity of the declines did not.

If this is a bear market rally, and we are going to see another leg down, then we don’t have time, at least based on the closest fits, to experience additional upset. We could push to a new marginal high or something, but we’re basically running out of time. .

It’s kind of a make or break situation. Either we’re going to conform to the historic “bear market rallies,” in which case we should be very close to being complete, or if we divert from them and continue higher, we’re going to know that we’re wrong. In that eventuality, we would obviously be looking to cover any short option positions.

If I was looking at the other side of the equation, and looking at the potential for appreciation in buying puts, it’s not there because the premiums are so high. In addition, I’m viewing this from a neutral standpoint as far as the trend is concerned. I’m not convinced one way or the other as to whether this is a bear market rally or a first leg up on a bull market. We’re going to step on the other side of this equation and see what this looks like relative to legs up, the greatest velocity legs up in history in bull markets.

Potential for a 1st Leg Up in an Overall Bull Market in Stocks to be Underway

Note here that I’m just throwing in the NASDAQ again because, again, it has a different look than the S&P 500 (see chart in the video). We made a higher bottom, and we made a higher high above the January 6th high. This is one of the points that we had placed on the bullish side of the ledger, that the NASDAQ, the high tech stocks, are not playing the game with the S&P 500. We have a schizophrenic technical picture in the stock market. When I say schizophrenic, that means that there’s kind of a tug of war between what the tech sector is saying and what the large cap stocks of the S&P 500 are saying.

The market is kind of in limbo here. Presumably that would work in favor of call option writers and even put option writers. Based on this significant advance in the market, should we see a top established, selling call options at the termination point of a rally would a trade recommendation we would make for subscribers.

Greatest Velocity Advances in Stock Market History

The last table (see video) I show the great velocity advance legs up in history in the S&P 500 and the Dow back to 1886. We are in very elite company as far as this current leg up of 27 percent. This 27 percent advance in 27 days ranks as the third greatest in terms of velocity advances in history. Only two other legs in history have advanced as rapidly as this.

1987: this is something of an aberration. I almost have to throw this precedent out because we saw the market move up 20 percent in one day. In one sense, it doesn’t really qualify as a leg up, but it has found its way into the data. I am going to dismiss that as a closest fit for our market since we have advanced 27 percent in 27 days.

Final bear market low in 1932: After the culmination, bankrupting low had been placed in 1932, the market advanced 112 percent in three months and six days.

Now, our market has dropped approx 58 percent from high to low as far as this overall bear market. The S&P during the Great Depression dropped 87 percent, but many stocks went bankrupt. The financial damage was worse than what the index represented, and yet the index dropped 87 percent, a horrible situation. By the law of action and reaction, once you have culmination lows where a market gets pushed to that kind of an extreme, it is not a surprise that the market is going to have a snap-back rally, so to speak, and that is what occurred in 1932.

What do we learn from that with regard to our situation? We have to log that into our memory as well since we are in the middle of the second greatest bear market in history. Then the first leg up presumably could be of the highest order. At this juncture we are up 27 percent. Can we go further than that if there is a low in place? The answer to that question is yes, but I don’t think that is going to happen. Again, we are dealing with a ledger: bullish factors on one side; bearish factors on the other side.

You look at these, and then it just gets down to probability. We are not in the business of being right in the markets; we are in the business of putting in the right kind of bets or speculating at the right points in time, knowing that a certain percentage of those aren’t going to work out, but a greater percentage are going to work out. Hopefully you are making more money on the profits than the losses, and that is how the whole game is played.

1974: This is a very interesting precedent because this is the recession of 1974 which is the third greatest bear market in history behind 1932 and our bear market. While in 1974 the market declined 50 percent, you would have to say the 2002 market was comparable as well. The first leg up was a very sharp 21 percent in one month and four days. After the November 7th, 1974 low, there was a quick spike to the up side, and then the market experienced a retracement into what would have been a higher bottom. That was the point in 1974 to really load up on the long side of the market for what would be an approximate two-year bull market into the 1976 high.

We do have a precedent in 1974 that suggests that the first leg up off a bear market would be very short lived, very sharp, followed by backing and filling. In our situation, the equivalent is if we have a final bear market low in place, we’ve had a sharp first leg up, we are going to see some backing and filling, and then we will see the market experience a second leg up in an overall bull market.

However, as I have said right along, this is the environment in which I believe it is prudent to sell options because the traders out there are bidding them up. The sellers are not coming to the table because of all the volatility that has taken place over the last nine months, so you have these exorbitant premiums.

I did want to say that for those of you that do option writing that look at situations like this, I believe the S&P is in a very interesting position to write call options or write options, period. When I do that, I generally risk 100 percent of what I expect to make on an option.

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No Significant Breakaway to the Downside Expected in Silver

For example, the July Silver options expire on June 25th. If we’re at kind of the midpoint, then we could be down at 1050 by that point in time. Percentage-wise, that’s a significant move from 1384, let’s say down to 1050. However, the options are so pricey and so expensive that you just don’t have the multiples as far as risk-reward. It’s not that exciting.

In the meanwhile, our better tact is to look to inner short positions in the futures where perhaps the market pattern or price formation will shape up, which will allow us to take a very modest risk with the possibility of a nice reward.

It’s kind of the same situation with the S&P 500 as in the silver because the historic volatility in these options is so high. Even if you’re right in the direction – whether to the upside or the downside – you’re paying through the nose for these options and there just aren’t great multiples available. You might make one-and-a-half times your money. It’s just not exciting.

The ideal is something like the soybean oil where you have the prospect for a 10:1 to 12:1 risk-reward opportunity; being no more right in the bean oil than you would be, say, in the silver market, necessarily. This comes into play, obviously, with regard to looking at the risk-rewards moving into a trade, and those dictating the value of that particular trade action.

So, I’m watching the silver. I like what has taken place. We’ve been sitting on the sidelines, anticipating that if the market did move into these fan lines (see video/chart), then maybe we could do something. Well, that happened. So, the first order of business was moving into the fan lines, and that’s happened.

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The overall decline, anticipated decline, that was very modest, as you can see. We established our top on February 23rd which came in very close to replicating what occurred in 1980 during that bear market rally.

The market has sold off sharply within two days. It has seen significant retracement to the upside so I do expect to see the silver market decline. The probabilities favor that; however, the options are extremely expensive and the level of ascent to decline that we would expect, I should say the decline, the velocity of the decline should be very modest.

It’s a situation where we may have an accurate forecast but there really isn’t the opportunity to make serious money on it.

I am going to be updating you with regard to this market. Probably the most prudent approach is to actually sell options. Sell call options for example, now that we are into this fan line. That is probably the most prudent thing to do since the options are very expensive, very pricey. That may be the most prudent way to play this market.

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I want to point out a number of things here. We had mentioned back on February 24th that the soybean complex held its own in spite of continued weakness in the stock market, that would be an indication that the market was in a strong position and that has been borne out.

Also, sometime back we had pointed out the 60-year cycle, which is the most important inflationary cycle that we’re looking at right now and has the potential for turning commodity prices higher, that was the shortest lived historic deflationary move in history.

Based upon that 60-year cycle, that was one of the cycles that put us short back in July of last year. The final bottom basis that 60-year cycle was as of February 9th, suggests we would have bottomed as of February 9th, but the time period based upon the 60-year cycle in the soybeans would have bottomed as of March 2nd which was exactly our low in the soybeans. That is very interesting that that time period came in right on target.

In looking at that 60-year cycle, the ascent which took place once the final low was in place; the leg up which took place in the soybeans during 1949 into July of 1949 suggests we basically are running really hot to the upside. But based upon an average overall ascent during the 60-year cycle, this would be the progress that we would expect in our market.

Now, dropping down in the soybean oil, we have felt that this market was in a stronger position than the soybeans. It topped out in March of 2008 whereas the soybeans didn’t top out until June, so we actually established a lower top in soybeans so the overall bear market is more mature.

You can see this 1976 precedent bottomed within one day of our low. The ’76 precedent bottomed as of March 17th. Our low at 2966 this past week established its low on March 16th, within one day.

In both these, the soybeans and the soybean oil, we have some bullish cycles which have now come into play.

In looking at our call options positions, obviously, a very favorable session today in the soybean oil. The July options expire on June 26th so these are the options that we’re holding.

If we were to replicate the 1978 advance, again, we would see the market push up the $46 level. Following the 1976 precedent would mean prices would go up towards the $46 level. We have plenty of time on these options to see this borne out. These were very significant moves, 57% and 48%.

If we have the same DNA and we’ve demonstrated it up until right into this buy signal, then we would expect to see this market experience, that kind of percentage of gain, and the possibility would be to see these options increase 10 to 12 fold.

We will likely look to take profits before, on partial positions, anyway, we would like to take profits on the way up but the prospect is for a real home run situation there.

I like how everything is playing out as far as the soybean complex is concerned.