Sideways Corn Setting Up For Potential 'Big Move' This Summer

Includes: CORN
by: RMB Group


The longer a market goes nowhere, the cheaper options get. One market that fits this bill nicely is corn.

History tells us this sideway trading range won’t last forever.

We Caught a Break – and Perhaps a Bottom – in Cocoa.

Spring has barely sprung and March is living up to its reputation by going "out like a lamb" - at least where commodities are concerned. Nearly the entire sector - including grains, precious metals and energy - has chopped sideways since last summer. This may not make for an exciting story, but we believe it will set up a number of low-cost trading opportunities for those who are patient.

Sideways markets reduce participants' expectations of volatility. Since volatility is a big component of option price, low volatility tends to reduce the price of both put and call options. The longer a market goes nowhere, the cheaper options get. Eventually they reach a level that screams "buy me!" Markets do not go sideways forever. Like a coiling spring, the longer and tighter they wind themselves up in a trading range, the bigger the potential breakout. Combine this with cheap options and you get the key ingredients for a "big move" trade.

One market that fits this bill nicely is corn.

Data Source: Reuters/Datastream

The yellow grain has a fairly consistent history of trading sideways for multi-year periods, typically bouncing around its lows. These sideways periods tend to be followed by big upside price breakouts. Consecutive years of bumper crops in the US - the world's biggest supplier - and a record crop now hitting the storage bins in South America have kept corn under pressure. At the same time, soaring global demand due to changing diets in population-heavy Asia has prevented prices from plummeting below long term support. This has kept the yellow grain locked in a fairly tight trading range since the summer of 2014.

History tells us this sideways trading range won't last forever.

Global demand for corn has grown to a point where the market needs a consistent supply of bumper crops - especially from the US - to maintain equilibrium. Any unexpected weather event has the potential to disrupt this supply and send corn higher in a hurry. In this era of global climate change, unexpected weather may be the new normal. With the price of corn currently below the cost of production, adding to our existing bullish positions in anticipation of unforeseen weather is getting more tempting.

If you own the hedged long futures position RMB Group "Big Move Trade Alerts" recommended last August, stay with it for now. Corn has a seasonal tendency to bottom in late spring before drought and excessive heat become concerns.

If you don't own a position in the market, stay tuned. We are patiently waiting for the volatility premium embedded in the December call options to decay a bit further. We believe a technical buy signal could come any day - and will let you know when we feel it's time to pull the trigger.

We Caught a Break - and Perhaps a Bottom - in Cocoa

Markets anticipate. This is characteristic of most markets. Fortunately, it is working to our advantage in cocoa right now. We suggested using December 2017 call options to create a bullish position in our February blog because we noticed that the chocolatey stuff had gotten crushed and was resting against long-term support. We were also aware that global demand was growing and the market had just flashed a "buy signal" by closing twice consecutively above its previous day's high. Call options were also ridiculously cheap.

Less than a month after establishing our bullish position, The International Cocoa Organization released some of the most bearish supply numbers we've seen in some time. Cocoa prices fell, but did not break the 9-year support level we recommended buying against. We consider it extremely encouraging that cocoa was able to rally in the face of bearish news. That cocoa has closed above both its 38-day moving average and nearly year-long downtrend is good news too. RMB Group trading customers should continue to hold their bullish December call option positions.

Data Source: Reuters/Datastream

Swing and a Miss, but Only "Strike One"

It turns out we were a bit early on our suggestion in late January to fade the "Trump Bump." Our sell signal did not work out, but we didn't risk much either. The maximum risk for our March 2017 put recommendation was around $350 plus transaction costs. If you followed our advice to exit on two consecutive closes over old highs your loss was even less. If you still own the June 2100 / 2200 bear put spreads suggested in the same issue, we recommend staying with them for now.

At 29, the Shiller PE ratio for the S&P 500 remains in nosebleed territory. It was a little over 30 just prior to the 1929 crash. It also appears less and less likely that Donald Trump will get the kind of tax cuts and infrastructure spending the stock market was counting on. If something doesn't break Trump's way soon, the market will begin pricing both of these out.

Stocks flashed another sell signal on Tuesday. Consider buying June 2150 / 2250 bear put spreads for $650 or less. Your maximum risk is $650 plus transaction costs. These spreads have the potential to be worth as much as $5,000 should the E-mini futures hit our 2150 target at or prior to option expiration on June 16, 2017.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that R.J. O’Brien believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.