Ideally we would be talking about a mega rally on corn and soybeans following flooding and heavy rains across most of the mid west during the peak of the planting season, but this is not the case. I suspect there are two reasons for this. First I believe traders have been fixated on supply demand numbers and burdensome inventory levels and not the weather. I expect this will change soon. The second reason grains have not lifted off yet could be tied to commodities as a whole and oil in particular.
The chart below shows consolidation in commodities beginning last summer. The previous low in the CRB Index from August 2016 was 176.67. The CRB touched 176.68 late last week. At the very least, this has become something to trade because the risk is easily managed.
This is an actionable point. Its a place where you can easily define the risk, enter a position, and place reasonable stops. The risk/reward ratio here is
On the chart below, you can see that oil has formed a swing low. This is the signal to enter a long trade. It is not a guarantee that prices won't still move lower, but it is a strong entry signal. I would prefer that the CCI had moved below -200.
Sentiment values are probably the main reason I feel very guarded in recommending this trade. Despite recent weakness, the optix still shows that there are 40% bulls. I would prefer that this level be lower than 30 with the oil priced around $42.00. In fact, the optix are slightly higher than they were ahead of the last daily cycle from last March. When we were stopped out of our oil short in March, I said then that I thought we would still have one cycle lower, which we did. The reason I felt we would have one more cycle lower was that I did not feel sentiment levels were not low enough. Here we are again.
My recommendation is to place a synthetic long trade today on your corn or soybeans using crude oil as a vehicle. I am expecting to keep this position at least three weeks because daily cycles last at least 30 days, and I am expecting this to be a right translated cycle out of a yearly cycle low. The position size is interpolated to make the oil contract the same in size as the corn or soybean contract margin wise, so one oil position is roughly the same as 3.6 corn contracts, or 18,000 bushels or 1. soybean contracts, or 6,429 bushels. Below are the contract specs you need to know.
So for every 18,000 bushels of corn or 6,429 bushels of soybeans you expect to grow, you would want to buy one December oil contract at $48.00 per barrel. You would keep the stop at $46.90 using the December contract. The stop would mean that for every contract you are risking no more than $1,100, or .061 per bushel on corn and .171 per bushel on soybeans. The stop is loose to give the contract some room to move through any volatility of a basing pattern.
If this is the beginning of a new intermediate cycle like I am betting on, we should see a very powerful rally, probably to the $56 area. That would be an $8.00 move, or $8,000. This would be worth .44 cents per bushel for your corn and worth $1.24 per bushel on your soybeans. This is a 7-1 risk reward ratio for the corn and soybeans.
In summary, my biggest concern is that sentiment is not as pessimistic as I prefer. I like how the CRB seems to be forming a double bottom. Most of all, I like the potential reward for the limited risk.