Tim Walker
Tim Walker

Over the past couple of weeks there have been some very interesting discussions on Corn on my page of the Safety in the Market Forum. I would like to summarise that material for those who may not have been following it. Corn is a great market for people wanting to get started trading commodities. It has lower margin and risk than most others, and has been making good ranges lately.

Chart 1 – Position on 15 December

click chart to enlarge

Here you can see the market action over the past couple of years. In the second half of 2010 there was a big bull market, which on 10 June 2011 made a double top with the previous all-time high on 23 June 2008. Either side of this top was a double bottom on 16 March and 6 July. Both of these dates are close to seasonal dates – 21 March and 7 July respectively. Drawn on this chart is a Lows Resistance Card from the 8 September 2009 low of 302. As you can see, this double bottom found support at 200% of the low price. Indeed, the 6 July low was 604 exactly.

When these lows were broken decisively on 30 September, you would naturally expect continued downward movement. However, the market made a low the next trading day, 3 October. Chart 2 gives some reasons behind this reversal.

Chart 2 – Reversal on 3 October

click chart to enlarge

While these turns are not in even increments of 90°, notice the turns early in the month every 3 month, from which good moves resulted – 4 October 2010, 7 January, 11 April and 6 July 2011. It was almost exactly a 100% repeat of the first big move from the 10 June double top, and if you look closely, there was a key reversal day on the day of the low.

Chart 3 – Rally and Subsequent Moves

click chart to enlarge

While all this might have been confusing at the time, following simple trading rules will generally help you navigate through the confusion and stay on the right side of the market. After the reversal on 3 October, there was an ABC short trade signalled. This is not marked on Chart 3, but a Point C showed on 5 and 6 October, the first 2 days’ rally from the low. But with Point B being at 100% of a previous major range, and with the rapid fall from the 29 August top potentially giving an oversold market, this would be a risky short trade. (The exception would be if you had been short all the way from the top and had pyramided on the way down – then you might take the extra signal because you have large profits and you are only taking a small position.)

In any case, the first higher swing bottom was, as usual, the safest place to go long. Although it is not drawn on the chart, the next top of 21 October was at the 150% milestone of this first range out. Either taking profits at 100% or trailing swing bottoms would have made money on the trade.

Next, there were 3 tops on 27 September, 21 October and 9 November. The last of these was again a seasonal date. This would have been difficult to trade as the market went sideways, but again, the first lower top trade on 16 November gave the signal for a good move. A subtle point was that all of these tops failed to reach the 50% retracement of the previous range – a sign of weakness in the rally.

Then, in late November and early December, there were 3 bottoms, all around the level of the 3 October low, but slightly higher. With this potentially giving a count of 4 lows around the same level, you would be on the alert for a break-down, which would be a sign to add to your position if still short.

However, the signal was never given, and instead the market reversed and went higher. This would be no surprise, since Gann states to expect a rally whenever markets make a low just before or after 22 December. The last low was on the 15th.

In this case, waiting for the first higher swing bottom left you high and dry. This of course is everyone’s nightmare, and generally leaves you doing some historical revisionism and saying, ‘I would have gone long straight away after the low.’ Let’s face it, you wouldn’t have. Sometimes you just miss them. And remember that waiting for the first higher bottom/lower top kept you out of trouble for the previous 3 months. Also, I have noticed that these long runs with no reversal day often signal the end of a move.

Again, on 3 January , the same level as the previous highs was reached. You would be ready for a potential upward break-out. But with 12 continuous days of higher lows, was the market perhaps overbought? Would the next ABC long trade be one you would feel comfortable taking? Remember both Gann and David say to be on the alert for changes in trend in early January.

Chart 4 – Christmas Rally in Corn

click chart to enlarge

In this case, the first lower swing top trade would be your saviour, as it got you short the day before a surprise bearish report on crop production had the market opening almost limit down in the pit session. While that bar appears to be an outside continuation bar, a comparison with the pit session chart C-Spotv will show you that in reality there was a small up bar in the electronic trading overnight. Then, with the release of the USDA Report before the opening of the pit session, there was a huge gap down, and it was too late to get on board.

The message behind all of this is that, if you can put out of your mind what you think the market is going to do, and instead practise reading the signals on the chart and combining that with your time and price analysis and your trading rules, you will more often than not stay on the right side of the market and keep making money. After all, that’s what we’re here for!

Knowledge is Power!

Tim Walker