USDA shocked the corn market by dropping quarterly stocks to 988 mb as compared to the 1.181 bb projected in the September 2012 supply and demand report just over two weeks ago. Carrying this number forward through the 2012-2013 marketing year, given the numbers USDA provided in September, puts ending stocks to use at a record low 4.8%.
The question is, does the market agree? Is corn really that bullish? A look at the long-term monthly chart as one month comes to an end and another gets set to begin could provide the answer.
Since we are talking about fundamentals, let's look at the futures spreads first. Keep in mind that the trend in futures spreads is a technical way of looking at the market's view of supply and demand. In the case of corn (bottom study) the trend of the nearby spread has been down since the peak of a 44 cent carry at the close of trade in June. Since then, the nearby spread has fallen to a weak carry of 3 1/4 cents at the end of September. This downtrend (nearby contracts losing ground to deferred contacts) reflects a less bullish/more bearish commercial outlook, seemingly not in step with the idea that the US is now facing its tightest supply and demand situation on record. Previously, the tightest ending stocks to use on record was 5% at the end of the 1995-1996 marketing year.
The long-term trend of the futures market (top chart) remains sideways to up with the nearby contract holding in a trading range, albeit wide, between the recent hide of $8.49 and technical price support near $6.92 1/2. This indicates that the contract should continue to consolidate, unless pressure from the commercial side turns the trend sideways to down.
The idea that the market is moving sideways to up, for now, seems to be confirmed by monthly stochastics (middle study). The faster moving blue line is above the slower moving red line, generally an indication of bullish momentum and an uptrend. However, these same stochastics did not establish a bullish crossover (blue line crossing above red line) in oversold territory below 20% back in June when the low was established, so technically never truly entered a major uptrend. The last major crossover remains bearish, with the crossover that occurred back in March 2011 (blue line crossing below red line above overbought level of 80%).
Initial retracement resistance is now pegged at $7.77, a price that marks the 50% level of the downtrend from the August high ($8.49) to the September low of $7.05. Given the still neutral commercial reading of the weak carry in the nearby futures spread, a 50% retracement seems most likely before the market comes under pressure again.
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