Trading Techniques  |  OCT 1997

Trend-Following The Corn/Wheat Spread by Scott W. Barrie

Grain markets offer profit opportunities due to the seasonal nature of their planting, crop development and harvesting cycle. During certain times of the year, the price of the grain crops are especially vulnerable due to these seasonal tendencies. Here are some trading strategies based on seasonal spread trading, using a trend-following method to filter seasonal signals. Seasonal analysis is comparable to any other analytical method; we assume that future price movement will be similar to past price movement. When working with seasonal analysis, you review past price behavior within the frame-work of seasons or some other time element. Identify any recurring patterns and then anticipate that future price action will follow the historical patterns. Of course, all analysis, be it technical or fundamental, rests on using past measurements to predict future market behavior. Fundamental analysts — grain analysts, for example — base their forecasts on a number of historical fundamentals, including past crop sizes, yields and traditional demand levels. Using simple logic, if this year’s crop carryover is larger than last year’s, a bearish prediction could be made.

by Scott W. Barrie