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July 13, 2006

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Fear and Greed in a 'Weather Market' in Grains
Name: Jim Wyckoff

Learn More About Today's Author
Years Trading: Over 20

Favorite Movie: The Outlaw Josey Wales

Fear and Greed in a 'Weather Market' in Grains

When the planting and growing season is under way for the major row crops in the U.S. heartland, many traders focus on the grain futures markets. As we move into the mid- to late-July period in the U.S. Corn Belt, that is the timeframe when summertime temperatures are usually the highest. Corn plants are also in their critical "pollination" stage of development during that time, when a few days of hot, dry and windy weather can sap yield potential in a hurry. Indeed, weather forecasters this week were mentioning a high-pressure ridge forming over the western Corn Belt in the coming days, which can produce a "heat dome" to block out moisture and lock in heat for the Corn Belt.

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 who "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.

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 put options on corn that Friday that prices were pushing higher. 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. 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 was 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 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. The big radio stations that come to my mind are WNAX, WHO, WGN and KFAB and WMT. I'm sure many of you grain traders have a favorite station that I have not mentioned. If so, drop me an email and let me know what station is your favorite--even you folks in Canada and Australia, or other countries.

As this present weather market in the grains plays out, let's take a brief longer-term technical chart look at corn, soybean and wheat futures markets:

 Corn: While a weather market has developed in corn, see on the weekly continuation chart for nearby corn futures that prices are still trapped in a trading range, with nearby prices presently in the upper portion of this range.

The direction in which nearby corn futures prices "break out" of this trading range on the weekly chart is very likely to be the direction of the next longer-term price trend in the market. Indeed, bulls and bears should not get too excited about any bigger price trend getting kicked off until prices move out of this trading range.

Soybeans: The weekly continuation chart for nearby soybean futures also shows prices are trapped in a trading range, but also moving into a narrower trading range as a wedge pattern has also developed.

Like corn, the direction in which nearby soybean futures "break out" of the trading range on the weekly chart will likely be the direction of the next significant longer-term trend in prices.

Wheat: Despite a recent strong downside price correction, the bull market in Chicago soft red winter wheat futures remains alive. See on the weekly chart that prices did back well off the May high, but trend-line support held fast and prices are again working higher.

It would not surprise me to see Chicago wheat challenge the May high of $4.33, basis nearby futures, or even move above that level, in the coming weeks, or sooner. However, my bias is also that the corn and soybean futures markets will have to also move higher to support a continued uptrend in the wheat market. I do not see wheat futures taking a divergent path from corn and soybean prices in the coming weeks and months.

Jim Wyckoff is the proprietor of the analytical, educational and trading advisory service, "Jim Wyckoff on the Markets." He has a website at and his email address is (Tele: 1-319-277-8643)

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