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When to Trade the Sharp Reversal in Corn

Corn prices still remain around their lowest prices in six years at the $3.70-3.95 a bushel range, down from their all time high of $8.49 a bushel set in August 2012.

Looking shorter term, on March 20 corn futures (ZC) moved sharply higher, completely reversing the drop seen between March 11 and March 18.

This sharp move higher creates a bullish case for corn futures, but analysis and trading aren't one in the same. While the outlook has changed for corn, it doesn't mean traders should immediately step in and buy. Remember the old adage:  "Plan your trades, trade your plan."

The plan in May corn is to be patient. Let another major price wave develop before acting. This recent move higher provided key information about which direction to trade in (long), but we don't have an entry point or stop loss level yet (which will also let us know the risk/reward of the trade). Those factors will be revealed on the next pullback.

Corn presents a good potential trading opportunity for the snap-back strategy. Corn has already seen a strong move higher, erasing a prior down wave. Next, the price needs to fall, but stabilize above the March low of 367 (preferably above 375). Once the price stabilizes--exhibited by several four-hour price bars moving sideways (a consolidation)--buy when the price breaks above the high point in the consolidation.

A stop loss goes below the low of the consolidation, with an initial target near 392. With the uptrend expected to continue, a trailing stop can be implement to catch larger gains, and prevent a profitable trade from turning into a loss in the event of a reversal.

Figure 1 shows a graphical description of how this could play out. The entry point may be different than depicted; it is the conditions that create the trade, not an exact price level. If the price continues higher from here, the strategy is still, just more patience is required.

Figure 1. May Corn Futures - 4 Hour Chart and Theoretical Trade
corn futures.jpg

Being patient means trades come to us. These conditions may not materialize, and thus no trade. If they do develop though, it presents an attractive reward-to-risk trading opportunity.

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