Jan 9, 2017 - Trade Idea: Index rebalancing may cause bounce in Corn and Wheat prices

We are ahead of Commodity Index rebalancing next week. During this process Commodity Index funds adjust their portfolios to those indices they follow which often results in buying the worse performing commodities and selling the high performers. Corn and Wheat as they were among the worst performers last year could probably benefit short term from this reweighting exercise despite the gloomy outlook for the coming year. So let’s look at the technical picture.

Corn

After the correction in the uptrend Corn created a higher low last month with an inverse head and shoulder pattern. Breaking above the last high would also mean completing the bullish flag pattern. So how to trade this? I usually trade 2 units of everything, the reason is simple. I like to take partial profits and move my stop loss to my entry minimising risk of loss.

ENTRY

Stop Limit Buy March contract above last high: stop at 363 and stop limit at 363.25

PROTECTIVE STOP

Both units at 352

TIME STOP

1st unit: end of week

2nd unit: 3 weeks

PROFIT TARGETS

1st PT at 383 and moving the second stop to entry

2nd PT at 398  

Wheat

After a really bad year it seems that the prices of wheat bottomed out. But high ending stocks and high yields are indicating that will have the wait for the return of bulls and rather a sideway trend is expected for this year. However short term bounce is still possible and as the double bottom on the chart below shows we have a pretty good chance to catch a part of it.

ENTRY

The entry would be rather conservative and I will wait with the buy until the price retest the neckline of the pattern with 2 units Limit to Buy at 420.75

PROTECTIVE STOP

Initial stop loss will be at 414

TIME STOP

1st unit 1 week

2nd unit 3 weeks

PROFIT TARGET

1st unit 445 (October high and Double bottom distance from neck line) moving stop to entry

2nd unit 455 (Summer consolidation)

Summary:

In both cases the main short term drivers are the Index rebalancing and Technical patterns, both pointing to the same direction. After the first week we close 1 unit from each moving our stop to entry. 

I didn't mention in the article the WASDE report scheduled to be released by USDA on Thursday, 12th January. While this could be a market mover, the expected buying by the index funds will not be affected much by the report as the rebalancing was decided already. Still, keep an eye on it and if you are close to target before the release, you may consider closing position to avoid any bad surprise.

Keep in mind that however nice a set up looks like, you should always watch your risk. You should never forget to check your money management rules before placing a trade and adjust position size to your maximum acceptable risk. If futures are too big, try to trade CFDs with smaler notional to trade fraction of the futures. Your loss could be higher if the market gaps below your stop, so be careful if you decide to trade these ideas.

Good luck and remember to watch your risk and be consistent

Mr. Tech Man

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. 

Contact: landoftradingATgmailDOTcom, Blog: landoftrading.blogspot.com