Technically Speaking
Darin Newsom DTN Senior Analyst

Sunday 11/10/13

Dec Corn's Reprieve? Maybe Short-Term

Corn market bulls, in a moment of honesty, would likely admit that Friday's round of USDA Crop Production and Supply and Demand numbers were not bullish. Rather, the market was able to rally because the reports simply weren't as bearish as expected. National average yield of 160.4 bushels per acre, total production of just under 14.0 billion bushels, ending stocks of almost 1.9 bb, ending stocks to use of 14.6%; none of these add up to a fundamental situation that should drive the market considerably higher.

Source: DTN ProphetX

Yet, contracts were able to rally and close near session highs Friday. Noncommercial traders, having built a sizeable net-short futures position of about 135,000 contracts over recent weeks, decided to start pocketing some of those gains. As discussed in Friday's Early Word Grains comments on DTN, there was a possibility of this group buying following the report on the idea that it would be the most bearish numbers seen this marketing year. Either that or harvested acres would be trimmed more than expected. In the end, it was a little bit of both that led to Friday's higher close.

But market bulls can also point to the fact that last Friday's action established bullish short-term technical signals on Dec corn's daily chart that would suggest the minor trend has turned up. Take a quick look at the price chart, and you'll quickly see a familiar pattern. After moving to a new low of $4.15 1/2, the December contract easily took out the previous day's high of $4.24 1/4 before closing higher for the day. In fact, Friday's peak of $4.29 1/2 was the highest the contract had traded since October 31. The action to close the week established a key bullish reversal on the daily chart, indicating the minor trend may have finally turned up.

At the same time this pattern occurred, another familiar signal emerged. Daily stochastics (bottom study) created a bullish crossover as the faster moving blue line (19.7%) moved above the slower moving red line (11.9%) with both below the oversold level of 20%. Again, when taken in conjunction with what was seen in the futures market, it would confirm the idea the December corn contract is now in a minor uptrend.

If all this is true, what would the upside price target be? Keep in mind that the fundamentals are not bullish. By USDA's calculations, the U.S. is looking at record production leading to large ending. By the market's own view of supply and demand, futures spreads, the longer-term situation is neutral to bearish. This should limit the potential uptrend 31.8% to 33% of the previous downtrend, with an outside chance of hitting the 50% retracement level. This creates price targets of $4.68, $4.75 3/4, and possible $4.94 1/2.

Where do these numbers come from? If we look closely at Dec corn's daily chart, the recently concluded downtrend actually began back on June 3, 2013. That day saw the exact opposite of last Friday's patterns occur. The December contract posted a new high of $5.73 1/2 before falling below the previous day's low and closing lower for the day, establish a key bearish reversal. At the same time, daily stochastics posted a bearish crossover with the faster moving blue line (83.3%) finishing below the slower moving red line (84.8%) with both above the overbought level of 80%. Since then there have been rallies, but nothing to create the bullish situation seen this past Friday.

One last thing, if you go back over recent blog posts concerning the December corn contract you'll see a great deal of talk about technical resistance at the 20-day moving average (top chart, thick red line). Investment traders may not be convinced of corn's bullish convictions until the December contract posts a decided break of this level. If or when it does, corn could see a quick short-covering rally similar to what wheat recently went through.

To track my thoughts on the markets throughout the day, follow me on Twitter: www.twitter.com\DarinNewsom

Posted at 9:16AM CST 11/10/13 by Darin Newsom
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