Traders Trying to Squeeze Out a Rally in OJ Futures
Fundamentals
It appears that the 25-cent plus sell-off in Orange Juice futures may have finally run its course, as commodity fund buying has lifted July OJ to 2-week highs. Since the middle of March, OJ prices have fallen over 15%, as ideal weather conditions in the Florida citrus growing region are seen as beneficial to the Orange crop. Moisture conditions have been adequate, which is reducing the need for irrigation by producers. The Valencia harvest is progressing well, as just over 5.23 million boxes have been harvested as of this past Sunday. However, the steep sell-off in OJ futures this past month has left the market technically oversold, which may have sparked renewed interest by technical traders. Analysts noted buy stops were triggered once the July futures moved above Monday's highs of 136.00, as weak shorts took profits after the market failed to make new lows last week. Large-speculators, who are holding a net-long position in OJ, according to the most recent Commitment of Futures report, appear to be adding to their positions this week, now that it appears that the market is trying to forge a bottom. However, with little in the way of bullish fundamental news accounting for the recent price rally, OJ bulls will need to see additional fresh speculative buying entering the market as well as muted selling by commercial traders in order to mark a significant change of sentiment and really put juice bears on the defensive.
Trading Ideas
The OJ futures market appears to be in flux, as speculators attempt to push the market higher while commercials look to sell on any major rallies, as weather conditions look favorable for crop production. However, as we move into the summer and the start of the Atlantic hurricane season, some traders may begin to price a weather premium into the OJ market, with increasing volatility a real possibility. Traders looking for a potential increase in volatility who are unsure about market direction could choose to explore the purchase of strangles in OJ futures options. An example of this trade would be buying the September 160 calls and buying the September 120 puts. With September OJ futures trading at 139.20 as of this writing, this strangle could be purchased for about 6.50 points, or $975 per strangle, not including commissions. The premium paid would be the maximum risk on the trade, with the trade profitable at expiration in August if September OJ is trading above 166.50 or below 113.50.
Technicals
Looking at the daily chart for July Orange Juice futures, we notice the market trying to make a "V-shaped" bottom, as prices rebounded sharply the day after the July futures put in a significant low at 128.40 on April 8th. The July contract has made a near perfect 38.2% Fibonacci retracement so far and now sets up a test of the 50% retracement level, which ironically is also near the 100-day moving average near the 142.00 area. The 14-day RSI has moved higher and is now in neutral territory with a current reading of 49.34. 128.40 is seen as significant support for the July contract, with strong resistance at 142.00.
Mike Zarembski, Senior Commodity Analyst
