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While a failure below 23-Mar’s 3.83 corrective low and short-term risk parameter in the Dec contract remains required to confirm a bearish divergence in momentum, we recommend buying the May Short-Dated 3.80 / Dec 3.20 Put Diagonal as a cautious way to top-pick this month’s rally. Against the backdrop of the secular bear trend we believe the past quarter’s lateral, labored recovery attempt to be another corrective/consolidative event consistent with a still-unfolding major bear market. And if there’s a time and place for the market to fail, it would be from the current upper-recesses of the past quarter’s 3.74 – 3.95-range shown in the daily log scale chart of the Dec contract.
If this technical call is wrong and market explodes above 04-Feb’s 3.95 corrective high needed to threaten the major bear trend, the negligible risk associated with the diagonal spread shown in the P&L graph below is something most traders can accept. If the market fails as we suspect, this diagonal spread will have the opportunity to perform.
The May Short-Dated 3.80 / Dec 3.20 Put Diagonal is quoted around 2-1/2-cents. A sustained break below 3.80 will see the long put component of this spread turn into an aggressive short futures position with bearish hedge characteristics as well. A potential threat to this strategy is the incessant range between 3.75 and 3.95. And the longer the market languishes within the range, the less appealing this strategy will become. With three weeks before the May short-dated options expire however, we’ll have plenty of time for the market to show its directional hand after tomorrow’s key crop reports before taking defensive action with this spread, if such is needed.
