Corn ETF Ready For Sharp Rise

The popular corn ETF [CORN] that trades on the NYSE has formed a potentially bullish symmetrical triangle pattern which presents an interesting potential trading opportunity.

A symmetrical triangle pattern is typically formed after a big move up or down, when neither the bulls nor the bears are able to gain control. The result is a market that drifts sideways forming a series of lower highs and higher lows which form a contracting wedge pattern often referred to as a coiled spring.

As the chart below shows, the contracting trading range has been accompanied by declining volume, something that often signals the tightening consolidation before the breakout, or the quiet before the storm.

A 9 Month Chart Of The Teucrium Corn Fund [CORN]Chart courtesy of Stockcharts.com

Between July 2010 and August 2011, the price of corn rose strongly from 339 to 799 cents per bushel, a rise of over 135%. Following this move the price corrected 27% and has been consolidating ever since.

It has been estimated that around 75% of symmetrical triangle patterns result in a continuation of the prior trend, in this case an uptrend. However the direction is not known for certain until a decisive breakout is seen.

How to play a possible breakout

Those looking to trade a possible breakout could either take a position now, or wait for the breakout to occur – something which should be confirmed by a spike in volume. In either case a tight stop loss should be used to limit potential losses.

Once the breakout occurs it’s common for the price to come back down and retest the downtrend line (red arrows), which should have switched from being resistance to being support. This pullback offers another potential entry point.

The price target for an upside breakout is calculated by measuring the distance between the widest two points of the pattern (green arrow), and adding it to the breakout price. A breakout from the current level of 40.96 would give a price target of around 47.

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