Tuesday, September 11, 2012

CORN: Bearish on food

A household economy is composed of a tripod: Food, energy and housing.

The largest one, housing, is fairly inelastic for most people -- it's a stable expense that takes money to change.

Energy is less than a third of what it was four years ago. It's an issue, but not much.

These days, the volatile leg of the tripod is food, whose cost is way up from where it was at this time last year.

My favorite vehicle for tracking food (and also one of my favorite ticker symbols) is CORN, the Teucrium Corn Fund, a commodity pool that tracks corn futures. It is traded on the New York Stock Exchange like an exchange-traded fund.

CORN today broke below its 20-day low, triggering a bear signal under the Turtle Trading rules. (Click here for a description of how Turtle Trading works.)

The commodity on June 11 began a rise from $35.63 (the CORN price at the opening that day), and it peaked on Aug. 21 at $52.71, a gain of 47.9%.

Today's breakout below $50.15, the low set on Aug. 14, is the first bearish sign in months.

Now, under Turtle rules, this breakout makes it mandatory to open a bearish position.

Traditional support and resistance, analysis, however, makes it much less clear. The price reversed on Aug. 14 from a low of $50.15, on Aug. 1 from a low of $49.60, and on July 24 from a low of $49.28.

The price has traded above $50 every day since July 25. So the bear signal level is part of a persistent support complex, and the piercing of $50.15 by no means signals a rout to the downside.

In fact, July 24 seems to me to be the key date. The price on that day opened at $48.86, and then made a steep run to the downside, hitting a low of $47.10. It then retreated to close at $49.21.

A run to $47.10 again would certainly be a bearish sign, as would a close below the close of that day, $49.21.

Generalizing it, let's say the support and resistance argue for a bear position below $49 or so.

CORN is fairly illiquid -- it trades 103,000 shares a day on average. Yet it has an excellent selection of option strike prices with open interest in three- and four-figures near the money. The front-month at-the-money bid/ask spread is broad, at 14%.

Implied volatility is running at 29%, in the lower half of the six-month range, and has been trending sideways since late August.

Options are pricing in confidence that 68.2% of trades will fall between $46 and $54.48 over the next month, for a gain or loss of 8%.

Options trading is a bit stagnant at this point, with volume running at 75% of the five-day average. Puts lead at 81% of average, compared to 65% for calls.

Today's fair-price zone, two hours or so before the close, runs from $50.02 to $40.47 and encompasses 68.2% of trades surrounding the most-traded prices, $50.23 and $50.24. The price now (1:41 p.m. Eastern) is right that the most-traded level.

Decision for my account: CORN is part of my pool for Turtle Trading, so I opened a bearish position, structuring it as puts expiring in February, with 4x leverage.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment