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Trader's Tip
Markets are inter-related and have been since the beginning of trading. Keep a closer eye on the key "outside markets" that are influencing your specific market of interest.
- Jim Wyckoff |
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Today's Featured Article
Hello once again Fast Break readers. It's always my pleasure to be able to show you some of my research and also share with you some continuing education, such as today's edition of Fast Break. I think you'll really enjoy this edition of Fast Break. It concerns trading the grain markets and summertime weather scares.
But before we get to the grains, I want to emphasize this edition's "trading tip," which points out the importance of markets being inter-related. My friend and respected long-time market watcher Louis Mendelsohn has been studying "intermarket" analysis for decades. Early on, Mendelsohn knew the importance of how markets react to each other. I encourage you to check out his company's
VantagePoint Intermarket Analysis Software.
Grain traders and most Americans are setting their sites on next weekend -- the U.S. Independence Day holiday. The summer respite will find barbecuing, baseball, boating and other summertime pleasures the order of the day -- capped off by evening fireworks displays.
But after the Fourth of July holiday period, grain traders will even more keenly focus on the critical timeframe that occurs after the holiday. Indeed, mid-to late-July typically finds the hottest weather of the year in the U.S. Corn Belt. This time period coincides with the extreme-heat-sensitive pollination stage of corn crop development. August is the most critical growing month for U.S. soybeans. U.S. wheat harvest is also wrapping up in July.
More specifically, Monday, July 6 will be a critical trading day in the grain futures. History shows that existing price trends in the grain markets can either accelerate or reverse that first trading week after the Fourth of July holiday.
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Here is what Conrad Leslie, the longtime and highly respected crop forecaster and market commentator, told me a few years ago: "Following the July Fourth holiday period, those who are interested in soybean and corn prices and production estimates look to the skies for the next two months for weather developments. Historical statistics indicate crops can either improve or decline...."
When the planting and growing season is under way for the major row crops in the U.S. heartland, many traders will be focusing more keenly on the grain futures markets. To see complimentary recent forecasts for the grain markets go here.
There is nothing like a rip-roaring "weather market" in the grain futures to seriously challenge the two most important emotions a trader can experience: fear and greed. In the heat of a weather scare in grains, prices become extremely volatile and trader emotions run very high, as the latest weather forecasts can and do turn markets "on a dime."
Some would argue that "fear" and "greed" are terms that have been over-used and over-emphasized in our industry. Yes, they have been bandied about a lot, but for good reason. In general terms, too much fear in trading will not allow a trader to even pull the trigger to enter a trade. Or, even if a trade is entered, fear will prompt a trader to set a stop that's too tight, or to exit a trade before a strong-trending move gets well under way. Importantly, fear can also cause a trader to lose sleep at night, which by itself can create a myriad of problems.
Generally, greed will cause a trader to become intoxicated with thoughts of hitting the "grand slam" of trading, instead of being content with a base hit or even a double. Home runs and grand slams occur only rarely in trading futures. Just like in baseball, futures traders that "swing for the fence" are much more prone to "strike out." Weather markets do allow for numerous base hits and a few doubles -- and even a triple here and there.
Trading a full-blown weather market in the grains -- and surviving to trade again another day -- is a great experience for all traders. While there is some degree of a weather market scare in the grain futures nearly every year, the "full-blown" weather markets that are usually marked by severely dry weather conditions, and even drought, in the U.S. Corn Belt come around only once every several years.
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Here are a few valuable lessons that a trader can learn by trading the grains during a weather market -- lessons that can be applied to trading other markets during more volatile trading conditions:
-- My experience in being involved with weather markets is that there is tremendous pressure on all traders to "follow the herd." Deviating from the consensus market opinion is not easy. However, it's the traders that can step up and sell into rallies or buy into dips that seem to have more success in trading weather markets in grains. In other words, doing some contrary thinking and trading can pay dividends in weather markets.
(I'll give you an actual example of how contrarian thinking and trading can be successful in the grains. The year was 1988, the last big drought year in the Midwest that saw corn and soybean prices skyrocket. It was a Friday in July that saw corn and bean prices trade sharply higher, based on ideas the hot and dry weather would continue in the Corn Belt. Then, after the close, the National Weather Service issued its 6-10 day forecast that, sure enough, called for more hot and dry weather for the Corn Belt. Bulls confidently headed home for the weekend. Even "local" traders on the Chicago Board of Trade floor went home long -- something most never do, especially over a weekend.
Well, come Monday morning, the updated weather forecasts had changed a bit, but more importantly, trader psychology had changed immensely. The drought and resulting poor yields had all been factored into the market with prior price gains, culminating with Friday's big push higher. Corn and bean markets traded limit down on Monday and recorded very sharp losses for around three days in a row.
I know of one trader who used contrary opinion thinking and bought out options of corn that Friday. He made a good deal of money that next week.)
-- For bulls, it's important to remember that markets are the most bullish at the very top -- it's downhill for prices from there. Recognizing the clues that suggest a top is in place in the grains, during a weather market, is especially difficult, as technical indicators can become less reliable. Thus, being content to catch a bigger part of a price trend should be the goal of the trader. Don't be disappointed if you did not capture all of a price move in grains in a weather market. Becoming greedy and trying to do just that will usually get a trader into serious trouble.
-- Weather markets in grains many times provide a classic example of futures traders "factoring in" fundamental events well before they actually occur. For example, in the big drought year of 1988, the soybean crop was most damaged during the months of July and August. To see complimentary recent forecasts for the soybean market go here.
August is the most important growing month for soybeans. Yet, futures prices that year topped out the third week in June.
-- Pyramiding trades or "averaging down" losing trades is a no-no. (Unless, adding futures positions were in your initial trading plan of action.) One cannot believe the extreme temptation there is to add to winning positions when a profitable trade is occurring in a weather market in grains. Being long in soybeans and hearing a bullish weather forecast heading into the weekend certainly invites adding a couple more long contracts on Friday. But that is pure greed kicking in. Again, greed in trading is not good.
-- Finally (this is not a lesson, but just an observation), trading the grains in a weather market can be just plain fun. Those traders who don't have expensive "real-time" newswire feeds or other connections right to the trading floor can still listen to the Midwest weather forecasts on radio or cable TV -- or look at weather maps on the weather websites on the Internet. WGN TV's Tom Skilling is probably one of the most closely followed weather forecasters in the grain trade. Most cable TV providers carry WGN.
When I'm on vacation in the summertime and traveling through farm and cattle country in various parts of the U.S., I always seem to find a radio station that will give me a "market report" on the grains. (My wife gets kind of annoyed with me scanning the airwaves for market reports.) I have many subscribers who are truck drivers or who are in the construction or agricultural businesses. I'm sure they tune in their radios to the stations that will provide them with market updates on a regular basis.
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About the Author
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Jim Wyckoff
has spent nearly 25 years involved with the stock, financial and commodity markets. He was a financial journalist with what is now the Dow Jones Newswires service for many years, including stints as a reporter on the rough-and-tumble commodity futures trading floors in Chicago and New York. As a journalist, he has covered every futures market traded in the U.S., at one time or another. Not long after he began his career in financial/commodity market journalism, Jim began studying technical analysis. By studying chart patterns and other technical indicators, Jim realized the playing field could be leveled between the "professional insiders" in the markets, and traders/analysts like
himself. As a proponent of Intermarket Analysis, VantagePoint Intermarket Analysis Software is one of the tools in Jim's tool-box.
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