September 19, 2012; 7:35am
In Mon's Technical Webcast we acknowledged that day's clear bearish divergence in short-term momentum below 175.80 as the market's definition of 14-Sep's 183.70 high as the end of the rally from 06-Sep's 156.55 low detailed in the 240-min chart below. In our opinion, yesterday and overnight's exact 61.8% recovery attempt to 179.10 contributes to a developing peak/reversal threat from last week's 183.70 high that will perpetuate the broader lateral and (we think) corrective range from 14-Jun's 148.85 low.
Furthermore, the fact that this short-term weakness stems from the 182.50-area that makes this month's rally 61.8% of the length of Jun-Jul's preceding 148.85 - 190.85 rally (i.e. 0.618 progression) would seem to contribute to a lateral triangle-pattern shown in the daily log scale chart above. And left unaltered by strength above at least 183.70- which is our new longer-term risk parameter to non-bullish decisions like long-covers and cautious bearish punts- this merely lateral structure on the heels of May'11 - Jun'12's major decline is arguably corrective/consolidative within that decline that warns of an eventual break to new lows below 148.85.
For the time being however and given the well-established range between roughly 155 and 185 that we expect to continue to constrain prices for the short-to-intermediate terms, we believe odds have increased for at least an intra-range relapse to the 160-to-165-range. Strength above 183.70 is required to negate this call and reinforce a broader base/reversal count.
To cautiously position for an intra-range relapse over the next three weeks, traders are advised to buy the Nov 170-165-160 put butterfly spread shown in the P&L graph below. The bid/offer spread on this strategy is currently 40/70 and we assume a buy-in price of 65. At $3.75/tick, the cost and maximum risk of this strategy is $243.75 per each 1-lot position.
At this price, the breakeven points at expiration are 169.35 and 160.65. As the P&L graph below shows, time decay (theta) works in favor of this trade that has a maximum profit potential of nearly $1,600 on a 1-lot position if the underlying Dec futures contract closes at 165.00 on 12-Oct's expiration of the Nov options 23 days from now. For a cost and maximum risk of just $243 on a 1-lot position and a maximum profit potential of over six times that amount, we believe this trade to be an excellent risk/reward bet per the current technical condition. Please contact your RJO representative for an updated bid/offer quote on this Nov 170-165-160 put fly in coffee.
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