Where to Place Your Stops on Commodity Trades (Hint: BELOW Obvious Support)

Here's a classic example of why it's advisable to keep your stops just below obvious levels - and out of the market, too.

Our rice trade thus far has not panned out as hoped (we bought the two-year breakout in rice prices on February 1st - here's why).

After an initial continued run higher, rice broke down in a big way.  Though I had mentioned moving my stops up to higher support levels, the market dropped faster than I acted - and I kept 13.50 in mind as a level of strong support (and a logical place for a stop).

Experienced traders say you should never enter your stop in the market - but instead keep it in your head, or on a spreadsheet, or in a software program not connected to your brokerage account.  Well, here's a great example of why they say that:

Source: Barchart.com (Click to enlarge)

How many weak hands were driven out of this trade when the powers that be sent rice "limit down" 3 days in a row - just below 13.50, where most longs surely had their stops placed?

I don't know how this trade will pan out from here - perhaps it will remain a loser - but I found this to be a classic case study on why: 1) you don't put your stops in the market, and 2) why you need to set your stops below the obvious levels that everyone else is using.

Now perhaps I should consider taking the Jim Rogers approach to buy on the dips rather than the breakouts - especially at or near key support levels.  We'll keep an eye on this entry strategy, especially with respect to the grains and softs.

Though "back in the day" (cerca 2005-08), buying the breakouts was a profitable entry strategy for me in these markets.

Ed. note: We publish a free daily newsletter, The Contrary Investing Report, which highlights trading and investing stories that are key to your financial success and survival. Please subscribe here.

An Update on Our Rough Rice Futures Trade

We've seen a lot of mustard on the price action in rough rice since we initiated our long May 2011 futures position - but for all that, we are just about where we started:

Which, actually, is perfectly fine with me.  Since I generally use a 15-day low as my stop on these trades, a week or two of sideways trading is great, because it raises the stop - and hence, lowers the risk on the trade.

When entering this trade at the beginning of the month, we really had to use 13.50 cents as the stop.  After a couple weeks of sideways action, we can raise that up to around 15.00, or even 15.50.

  

Source: Barchart.com

For the fundamental reasons and motivation behind this trade, see the article I wrote for Hard Assets Investor: Why We're Setting Up For a Rally in Rice.

Stratfor: Fall in Food Prices Likely Temporary

Stratfor reports that the current drop in food prices is likely to be temporary, because falling prices and the credit crunch will reduce supply next growing cycle.

The article confirms something we've been discussing here at length - the trends which originally brought about the supply/demand imbalance in the grains markets are still firmly in place, and that these supply constraints will remain until there is a large structural change in supply or productivity.

Are Any Grains Worth Buying at These Prices?

Are there any grains worth buying at these prices? Have you seen any article, commentary that may be of help?

This question was posed by our buddy and regular reader/contributor Moyo, who runs the fine commodity focused site FuturesCafe.

I think that sugar, cotton, and coffee are the most attractive agriculture plays at this point. For the simple reason that their prices have not moved up recently - therefore, additional supply has not come on the market. Couple this fact with the further tightening of supply that commodities will experience across the board as a result of the current state of the credit markets, and these, I believe, are good candidate commodities to lead the way up.

Cotton is the most attractive investment opportunity I can see - it is actually trading below the prices it was at when the bull market in commodities began in the first place.

Cotton's price spike in 07-08 was really a speculative phenomena. Traders started piling into cotton futures contracts, as everyone knew cotton was destined for a spike - driven by reduced supply as farmers planted higher priced corn and soybeans in lieu of cotton.

The self-fulfilling prophesy proved to be short-lived, as the market was not able to sustain a rally. But it's coming.

Wheat also may be worth a look here. Corn, rice, and soybeans interest me less, as they are coming off a recent run-up, and have been planted from sea to sea across the world. It may take more time to work off the new supply on the market - though it's possible that prices already reflect this.

BOTTOM LINE: "Ag-flation" is coming again, in a very big way. Agriculture is very attractive at current prices, but I would caution you against being "early" into these trades. Wait for an uptrend - you'll have plenty of time to build up your positions, as commodities, particularly agriculture, are likely to be the first assets to recover in price.

Rice Resilient

Maybe it's not time to quit on Rice yet!



Sorry - wrong rice :)

Close call for me - I had my stop down at 23.50. I was sure I was going to be stopped out, and am glad I hung on and waited to "take it like a man", rather than just selling around 23.70 (which I thought about).

After watching this market non-stop for the last two months or so, I definitely find today's rally (pleasantly) surprising. Lately rice has been stronger trading in the Asia sessions than the US - so I figured a down night in Asia last night would be the end of the line.

Stay tuned - we'll check back in on this one Sunday evening!

Sacramento Bee: Panic over rice prices hits home in capital

Well, when it hits the front page of your local newspaper, it's probably time to sell. It will be interesting to see where prices go this week. For now, the line is still going from the "lower left to the upper right", as Dennis Gartman likes to say.

Sacramento Bee: Panic over rice prices hits home in capital

If it asks for registration, try one of these logins.

What's Moving Now

I just picked up a Cocoa contract. I had been eying cocoa for about a week, but wanted enough validation to pull the trigger. Of course now I wish I had pulled it sooner - but that's the way it works.

Check out the cocoa chart here - very strong rally following up from the recent nasty correction. I haven't been able to find much news, other than funds buying (surprise, surprise) and a lack of sellers (gee, thanks). Though the lack of sellers is a bit interesting - perhaps all the weak longs were shaken by the recent correction.

Rough rice also appears to be in runaway mode - supply concerns are driving this. Nice quote from this article:

"There's been a popular misconception that the world can produce as much food as it likes. Well, it obviously can't. And Asia can't feed itself at the moment," Gerry Lawson, chairman of major Australian rice producer Sunrice, told Reuters.

That sums up the bull market in agriculture pretty nicely. If rice keeps running away, I may start walking around town wearing this man's jersey:


Corn - both technically and fundamentally - looks poised to continue its steady climb up. There is not a lot of room for error with this year's corn crop, considering so much is already "earmarked" (hardy har har) for ethanol.

And coffee's looking hot also, as news about disappointing Brazil exports, combined with the ever weakening dollar, has folks piling back into coffee contracts. Aw heck, I might have to pick up one of these contracts after I finish writing this post :)

Another Record High for Rice

Courtesy of Agora's 5 Min Forecast:

Headlining the global food crisis, rice found itself another record high yesterday.

Futures in Chicago ticked up another 2.3%, to $22.67, per 100 pounds when the Philippines -- the world’s biggest rice importer -- put in a buy order for 1 million metric tons. That’s more than 50% of all the Philippine rice imports in 2007… clearly, the government is concerned about food supplies.

According to the USDA yesterday, only 2% of the Arkansas rice crop is in the ground. Arkansas, the biggest rice state in the U.S., had planted 31% of its crop this time last year. As Kevin reported yesterday about corn crops this year… too wet, too cold to plant.

Rice, Anyone?

Props to our buddy Pharmer, who called this one on the correction a few weeks back.

Rice was the last shoe to drop in the grains correction, and the first to be roaring back out of the gate.

I just had one contract filled at 18.98, and rice is currently sitting at 19.05 - basically an all-time high.

Rice has doubled in the last year, but we'll see how much room it has left to run. I'll probably look to add a contract or two on continued strength.