Technically Speaking
Darin Newsom DTN Senior Analyst

Saturday 09/01/12

Possible Top in the Corn Market

The beginning of September not only marks the start of a new season, but also the unofficial move into fall. And since it has been in the limelight for much of the summer, what better way to start autumn than taking a look at the long-term monthly (most active contract) chart for corn.

Source: DTN ProphetX

The market has extended its uptrend that began with the bullish reversal posted in June (look back to the third line from the right on the monthly chart).

The follow-through rally in July saw the more active December contract post a new high of $8.20 1/2, moving well above the previous high of $7.99 3/4 established in June 2011. Also note that it was in June 2011 that a bearish key reversal was posted, in conjunction with a bearish crossover by monthly stochastics (bottom study), moving the market into a major (long-term) downtrend.

Market bulls will be disappointed by August close. The December contract closed lower for the month, establishing a doji, a candlestick pattern that reflects indecision by traders. When it occurs following the posting of a new high, the December contract hit $8.49 in August, it may be an indication that the trend is set to turn down.
Looking at the monthly stochastics study, note that the previous rally began with a bullish crossover, but not one with its origins below the 20% level. This can be read as a move to a sideways trend rather than a major uptrend. Therefore, a bearish crossover would be expected before stochastics reach the 80% level. At the end of August the faster moving blue line was at about 72.5% while the slower moving red line was at 58%.

While no crossover has occurred, it would not be surprising to see the market fall back to initial support at $7.45, a price that marks the 33% retracement level of the previous rally from the low of $5.36 1/4 through the August high. Given that the forward curve (not shown) remains inverted indicating a bullish commercial outlook, a selloff in a sideways trend should be limited to the 33% to 50% range.

The bulk of the selling is expected to come from noncommercial (investment, hedge fund, etc.) traders due to the combination of historically high price and elevated market volatility. The most recent CFCT Commitments of Traders report showed this group reducing their long futures position by almost 11,500 contacts (as of the week ending Tuesday, August 28). This activity could continue over the next few weeks until the market pulls back to the above mentioned support range.

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Posted at 5:04PM CDT 09/01/12 by Darin Newsom
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