Three Charts Bearing Gifts

  • Posted on: July 27, 2010



First off, the ZC Corn. This chart shows that we have seen a 50 percent correction of the 66 cent rally. Today’s low took out the 50% retracement at 376 5/8. Next support is at 368 3/4. Take advantage of this down move to cover shorts. Depending on how much of a turn-around-Tuesday bounce we get, it also is a good place to go for a bullish ten to 15 cent bounce. A failure to bounce is a good indication that the market will be looking to punish the weak longs who jumped on the corn rally too late and are now long from the 4.00 to 4.10 window. In an attempt to buy the break-out and go with a momentum trade, these weak longs are now going to have their intestinal fortitude, or more importantly their trading discipline tested. Will they add to their losers? Will they average down, or will they blow out when their stops are hit. No one knows.
I personally look for a short term rally, a mini consolidation, and then at the end of the week, we will see either fresh bulls coming in to the long side, or funds gradually lightening the load, prior to a possible flip short.
Bottom line, buy a dip but be ready to quickly exit.

Second Chart, New Crop Beans, shows that we have had much less of a correction off of the recent highs. I look to be a buyer between 943, 940, and 935. A scale in buy over that ten cent band. Fundamentally, we are starting to see some decent Chinese Demand, and the fact that we haven’t had a further correction over the same time the corn has pulled back sharply, suggests to me, that there is better support in the beans for higher prices than in the corn.

Third Chart, New Crop Wheat, shows we are taking a pause for the cause. I never like chasing markets, especially when the up move is attracting attention from the general media. I recently had a prospective client call in asking how he could get long wheat “for the next 5 years”… A very bullish sentiment from someone new to trading. That usually means that somewhere out there is a sentiment bouncing around that wheat is going to be the next tulip mania. Apparently, word of a drought in Russia, the worst in 130 years, is giving fuel to the fire. Add to that that the public has not had a good bull story to sink its teeth into for quite some time, and we have a recipe for an emotionally driven bull market.

Throw in the fundamental story of drought in Russia and floods in Canada, and all we need is locusts here in the US, and we will have a rally with biblical overtones. That gives me pause as someone trying to address risk. When every one and his brother thinks its a nifty idea to own something, its time to pay the check and head for the nearest exit.

Granted this was just one person, but I am deathly afraid of the next Time or Newsweek cover which will have a picture of a stalk of wheat or corn on the front, touting some bullish story. Mark my word, that will be the end of the rally, and in fact, the day you should sell a bunch, put in a buy stop, and not look at prices for 3 months. I am sure such a strategy will be extremely profitable, if you can simply not read the paper or watch TV while the melt-down unfolds. Bottom line, I like looking to be short very short term in the wheat, looking for a 50% retracement to cover those shorts and then go long.

These Charts should give you plenty to think about as you plan your strategy on how to take advantage of the upcoming moves. Movement=risk=opportunity.

What you do with that opportunity is up to you as a trader/hedger/speculator. If you respect the risk, you will move through in fine fashion. If you respect the risk and do a good job of trade execution, the risk could prove to be quite profitable, because the moves have the potential of being substantial.
Bull or Bear, know where you are going with your losers. Plunging into a trade, followed by hoping and praying is not a risk management strategy with a very good track record.
Good Trading