I probably should say, I DON'T HAVE A CLUE!! and end this right here but you all know me better than that and I'm going to take a shot at it.

Star Wars is a great movie series but nothing can compare with the bull-bear wars of a weather market in the grains.  Sorry Luke, but the force is not with anyone when it comes to this theater of engagement. 

A weather scare is always at the beginning of a weather problem.  Every major drought started with a weather scare.  The thing to remember is that every weather scare doesn't end in a weather problem.  It other words a weather scare is a time period when we can say, "Houston we MAY have a problem."

Phrases that come to mind regarding trading a weather scare include, "just when I thought it was safe...."  and "here's another fine mess you have gotten me into..." and my favorite,... "But, the forecast says NO RAIN!!!"  The problem with scares is that they are driven by weather forecasts out 4 to 10 days where weather problems are driven by, "all I know is, its' not raining today." 

Usually drought scares are real emotion benders.  In the first stages, which is where we are as I write this, we literally live from forecast to forecast.  The market trades on forecasts more then it does on actual weather unless there is a complete surprise, which I have seen by the way.  One year we went home on a Friday with the market strong and no rain in sight for the Eastern corn belt only to have it rain 3 inches Sunday evening.  Believe me, that Monday was not very much fun as the markets opened Limit Down Locked.   So, there can be surprises but hey that's the name of this game anyway. 

During a scare market environment the main thing to remember is no permanent damage to the crop has occurred.  I know the bulls in the crowd don't want to think about that but this is where we are as I write this.  If it rains and the weather straitens out, we could have another barn busting yield even higher than last years record.  So, when the weather forecaster says, I see more rain, traders run for cover thinking $1.95 corn again.  That is until he says. "oops...never mind!!!  And once again we are on the war path.  Markets move dramatically on forecast rumors and when you think nothing has changed, the market suddenly moves sharply in one direction or another. 

The first stage is usually a warm-up for the big event.  We rally, then sell off and the bears say, "whoa, that was a close one" and start to look at $1.95 corn again.  Then the rainfall comes in and it wasn't as much as expected and now there is heat in the forecast.  Now the bears have to really turn around and say, what happens to price IF...and we are off to higher levels again.  The second stage is where the market moves dramatically because usually this is in the Mid-June time frame and depending on the early growing conditions, we may be seeing permanent damage start to form.  This is where the game changes.  If this is happening prior to July 4th, this can get right down scary with violent moves.  The reason is that rain can still save the day and while some permanent damage has occurred, it only trims the bumper harvest to an average harvest.  If it holds past July 4th, we are doing some real damage and now the market will not swing, it will just drive straight up ending with either rationing or there is a stop in the damage of the crop. 

Of course it's possible that the scare will end after the first stage and a second stage never begins.  It is also possible that a second stage starts only to end quickly and the market nose dive again.  If we get to the damage part of the market, things get hairy and trading it can get very expensive but the thing to remember is that when weather markets end...THEY END!!!

So here is the key to trading a weather scare and ONLY a weather scare, NEVER SELL IT WHEN ITS DOWN AND NEVER BUY IT WHEN ITS UP, UNLESS IT IS AT THE CLOSE!!  In other words, ignore the intra day movement as much as you can and use the close to determine your position.  If your trading in a weather problem DO NOT FOLLOW THE ABOVE RULE.  The best money made in a weather PROBLEM is buying it in the first 10 minutes if its higher on the day but again, don't do that if we are just in a scare.  Do these rules always work...Yeah...RIGHT!!!  Nothing always works.   The point here is that trading these types of markets requires patience and deep pockets.  I recommend options if you don't have either. 

Another few points...One, day trading is really tough during a scare.  The market can move dynamically in a very short period of time only to correct the whole move in a couple of minutes.  It can get very wild.  IF I day trade, I don't EVER take the trade home if it is a loser.  NEVER!!!!  Second, never try to pick a top or bottom.  Allow the market to tell you it is a top and don't get all caught up in getting the high or the low.  Odds are high that you'll miss both.  Let the market turn before you go out on a limb.

What do I look for in these types of markets.  First, I day trade a lot especially if we are past the scare condition and there is damage being done to the crop; however, I follow my own advise and buy early in the day if I can get a signal and hold unless the trade becomes a loser.  Again, if that happens I don't take it home...EVER!!!  For position trades, I like to add on days in which the market makes new highs throughout the day as that is usually a good directional indicator.  I also look for days in which the market opens higher, sells off sometime during the day only to turn back higher later.  I buy those closes and put stops under the previous days lows.  Be careful here as these are the days that will get you as they look so good, then so bad and then so good.  Even so, that type of day is usually a continuation day and indicates we are still going in the direction of the close.   

Finally, weather markets usually end and if it is only a scare, it goes down a lot faster than it goes up.    

                                       A  LOT  FASTER!!!       

Save some of your enthusiasm for the short side of the market.  So don't get so bullish that when it turns you ride a dead horse into the ground.   Always be ready to turn on a dime and get SHORT.  From experience, some of the best money I ever made, was on the short side.  It's fast and sweet so have a mind set that is ready to go short and enjoy a nice ride to the dark side...err... I mean...downside!!!  Hopefully, it will be after you have enjoyed a nice ride to upside first.  If that happens, you'll be thinking the "force" is really with you and who the heck is Luke!!!

A word to the wise!!! 

 

 

There is a risk of loss in trading futures.