Published: November 13, 2009

A topic I’ve been stressing lately is the relative importance of macroeconomic market moves -- keeping a strict eye on the overall health of the financial market.

You see, the economic recovery in prices started in EVERYTHING last March -- but to be clear, the overall market and the profitable commodities market are inextricably tied together.

The S&P 500, my proxy for the stock market in general, has been a leading indicator for commodities. With stocks up over +50% from the lows it provides insight into future moves in other markets.

The CRB Index, Commodity Research Bureau, recently broke above the 267 level making new yearly highs. It’s now on target for a new near-term goal, which represents a +50% rally in commodities since last years dip.

Higher oil prices are also a good sign that the global economy is on the mend. In addition, it is supportive of stocks with Exxon and Chevron adding major points to the DOW sending it above 10,000.

Add it all up and it’s easy to see that the CRB, and other commodities in particular, are on target for now.

The Best Opportunity for Commodities Profits...
My recent commodities travels took me to the west coast to revisit acquaintances made during the July National Chicken Marketing convention.

My big takeaway from the exhaustive chicken information was that corn was deemed undervalued by most of the presenters and professionals in attendance. And I trust these guys, after all, it’s their business to know the cost inputs from the egg to the bird on your plate.

The corn crop at that time looked set to make it through the summer months in great condition with no fears in sight to disrupt high yields.

Though my view on trading weighs heavily on technical analysis I learned long ago not to ignore important fundamental information. The upside was greater for corn to rise than drift below $3.00 on perfect growth.

How to Turn Price Charts into Quick Gains...
Corn prices were low (just over $3 a bushel), and that’s exactly when I told readers of Resource Trader Alert to get into a corn play. Over at RTA we use options to directly play commodities themselves -- options help limit our risks while giving us a nice risk reward payout.

(I normally don’t give out the specifics of my trades -- but I’ll make a special exception for today’s article.)

For our corn option play the maximum risk was a little over $1100 dollars with six full months of fundamental factors to boost prices to $4.00 a bushel. Chicken convention consensus was that our goal should be reached by year’s end -- but in fact it was much sooner. The recent high on our RTA option play was around $2,400 -- which represents more than doubled our initial investment.

That’s just how quickly the commodity options can move.

The price of corn rallied +25% but our corn options ended up doubling in that same time. By using options we were able to maximize our profit potential and completely limit our risk.

The Charts Know More Than the Farmers...
The reality of fundamental trading on weather, planting intentions, yields, exports or crop disease is that the information does not flow freely to everyone at the same time. The farmers, seed salesmen and grain elevator operators use their legal inside information in the market before others. The price charts are one way of seeing what people know -- without having to “really” know.

At the July chicken conference the major fundamental support of grain prices was slated to be ethanol demand. But the present grain rally connection to ethanol is difficult to prove at best. In fact, the correlation with crude oil gains has just now only started to kick in as prices rise above $80 a barrel.

With that in mind it’s fairly safe to say that the combination of weather premium and dollar weakness started this grain move instead of the much-anticipated demand from ethanol and biofuel production.

The chicken men were right on price but maybe wrong on the reason. This is a perfect illustration of focusing on “what” the market is going to do, not “why.”

And although huge chicken-related profits aren’t quite hatched they are definitely on the right path to growing healthy, big and strong.

-- Alan Knuckman
Editor
Resource Trader Alert

Editor's Note: This article originally appeared in Penny Sleuth.