It's Logical

Cold Weather Freezes Orange Juice Demand?

Back in December, when we were experiencing super warm weather, I suggested a natural gas short trade for a 5 day period. This 5 day period saw one of the greatest declines in natural gas for the year.

Now, what to do when the weather is so very cold?

The answer is not obvious at all, but when you think about it, makes perfect sense: When you wake up like me on one of these frigid days in Chicago, where we have seen the temperatures below zero for many consecutive days, you may reach for a hot cup of coffee, but you may not even think about drinking an ice cold orange juice.

Sure enough, when I checked out the facts with my Market Information Machine, I saw that when it is super cold in Chicago in January or February (as defined by 5 consecutive days where the low temperature In Chicago is less than zero, then there is a high probability that orange juice will decline over the next four weeks. The average decline is almost 10%.

Looking out farther, we see the peak of the bearish edge occurs 53 trading days later. According to the 8 previous occurrences of this event, EventEdge indicates that JO has shown a very strong bearish edge that peaks 53 trading days after the event. JO declines in 100% of the cases (8 of 8) by an average of -14.1% relative to the close on the event date. This edge can be seen in this chart, which plots the return of the Orange Juice futures (rolling to the next contract in the series as needed) looking forward from the event date.

So, I’d go short the OJ futures outright, using the July series (the March contract will expire on Friday, February 16,  so I would stay away from playing this month) or buy the 180 July puts which are trading at around $8  (translates into about $1250 per option contract).

You can’t do anything about the weather, but you certainly can profit from it. For more history based trading ideas, and for the research tools you can use to find them, check out LIM's MarketHistory.com, which uses the Market Information Machine (MIM) to perform this sort of research.

Warm Weather Creates Natural Gas Trading Opportunity (UPDATED)

UPDATE - 4 January 2007

FOLLOW-UP ON HIGH PROBABILITY NATURAL GAS SHORT TRADE (see below)

In the original post, below, I relayed to you one of the surest bets in natural gas: to be short natural gas in the 12 to 17 day period after natural gas gaps down on the open two days in a row. As I mentioned, the fundamentals were also working in this trade's favor as we have had one of the warmest months of December ever.

This trade ended last week Thursday, with natural gas declining a whopping 13.6% during the 5 trading days called for to be short. This was one of the largest 5 day down moves in NG during all 2006, (NG was down 18.6% during the 5 days ending April 28, 2006 for the largest 5 day down move in 2006).

Obviously, this was a hugely profitable down move if you were short. It illustrates the power of the tool, the "Market Information Machine", ("MIM") that I used to find this trade. This is because, besides being able to formulate any situation that you can imagine, both technical (as was the case here) or fundamental, you can look out "what happens next" to many multiple slices of time periods after the technical or fundamental event happens to find the super "sweet spot". In this case, the super "sweet spot" happened to be the time period 12 to 17 days after the event. I know of no other machine or device that can help you easily find such super sweet spots after events. In the case of the MIM, it is a just a matter of setting up giant templates that automatically scour all time periods, and you can easily eyeball where to get in and out of a trade in order to maximize profits and keep risk at a minimum.

As in the case of this trade, not all events are followed right away with an extremely high probability of an up move or down move. In many cases, such as this one, there is a DELAYED REACTION. For example, if you looked out three weeks after this event , you would see that NG is only down 60% of the time, not something that you would want to necessarily bet the ranch on, or even consider putting a trade on for that matter. However, with the "Market Information Machine", you can see things more clearly, and with pin point accuracy, such that you don't miss great trades like this one.

If you would like to see me demonstrate how I can up with this trade, please send me an email and I will be glad to show you. However, the MIM is a very sophisticated product that has tons of data and events, and is priced at $5000 per month. Thus, it is only usually affordable to institutions. More reasonably priced, at $350 per month, is a subscription to Markethistory.com, a web site that we publish high probability trading ideas every day and give you a fair amount of the vast toolkit capabilities available with the MIM. Both are bargains! I know of no better tools to help one analyze the markets and take advantage of the historical odds that are many times hidden within the data.

Original idea posted on December 22nd:

It is a lot warmer than usual in most parts of the United States, and this is bearish for natural gas. Moreover, when natural gas gaps down two days in a row, as it did on December 4, then NG goes down 94% of the time within 12 to 17 days after this occurrence.

The average down move is 6%. Yesterday, the start of this trade, we saw natural gas decline 4% right off the bat. If we get a rally in natural gas, back to around $7 on the front month, I'd short some NG futures and cover on the close on Thursday next week, when the trade will be over.

To view a list of the 20 prior times that NG has gapped down two days in a row, click on this link to open a pdf file (78K). You can see that the average down move of 6% is almost double the one time that the trade did not work in 1998.  This is one of the highest probability trades in NG that I know of.

Veterans' Day in El Nino Years, and Soybean Prices 6 Months Later

The US Weather Service has made it official: We are now in an El Nino year. These years, in which the temperature over the Pacific Ocean is warmer than usual, can wreak havoc with the weather during the upcoming growing season.

Dramatic Impact of El Nino Weather Patterns

Since 1970, we have seen El Nino years in 1972, 1976, 1982, 1987, 1991, 1996 and 2002. In every single case, Soybeans were higher from the close on Veteran’s Day in these years to the close of Soybeans 6 months later.

Remember the drought in 1988? The average up move was a whopping 42%!

Soybeans have been on a tear lately. I’d use any significant pullback to load up  on July Soybean futures and/or buy some  out of the money vertical call spreads. Again, I’d use the July series and would  go long, for example, the 7.00 calls and short the 7.60 calls.

Soybeans are one commodity that has not really participated yet in the commodity boom. Their time is nigh!

The Soybean's time is nigh!