Technically Speaking
Darin Newsom DTN Senior Analyst

Friday 08/15/14

Dec Corn: Setting the Stage

For weeks, DTN analysis has been looking at a possible turn in the corn market. And with the activity seen in the more active December contract, it looks like the stage is set for a move into a secondary uptrend.

Source:DTN ProphetX

Notice that this week has seen December corn trade outside of last week's high, in the process posting a new low of $3.58. If the contract closes above last Friday's settlement of $3.63 1/2 (it finished the CME Globex overnight session at $3.78), it will have established a key bullish reversal on its weekly chart.

For those wondering about the significance of this pattern, the last time one appeared was the week of January 6, 2014 (top chart, green arrow). From its then low of $4.35 December corn was able to rally to a high of $5.17 the week of April 7. This 82-cent rally resulted in a close test of resistance at $5.24 1/2, a price that marked the 50% retracement level of the downtrend from $6.14 (high from the week of September 17, 2012) through the $3.58 low.

So is the contract poised for another strong rally? Possibly, just not as strong as what was seen earlier this year. An important difference is in the December to March 2015 futures spread (second study, green line), and what this says regarding the commercial outlook of the new-crop market. Back then the spread was in an uptrend, meaning the carry between the two contracts was weakening. However, as we see now the spread is trending down (strengthening carry), moving to a new low of a 13 1/4 cent carry. Granted this is a weekly close chart, so we will need to see if this holds through Friday's close (the previous low close was last week's 13-cent carry).

The more bearish view of market fundamentals could limit corn's potential uptrend. Technically, the initial target is near $4.18 3/4, the 33% retracement of the previous sell-off from the $5.17 high through this week's low. Notice that if the contract can do this, it would close the bearish gap left the week of July 7 between $4.14 1/2 and $4.10 1/2.

Speaking of gaps, it is also possible that Dec corn could establish an island reversal next week. If it closes near its session high this week, then the U.S. Midwest is disappointed on the rain front again over the weekend, and the contract gaps higher on the open of Sunday night's trade, it would create a bullish island reversal to go along with this week's key reversal.

And there's weekly stochastics (bottom study). Note that the faster moving slow line has finally crossed above the slower moving red line, with both below the oversold level of 20%. This is a classic example of a bullish crossover coinciding with reversal patterns by the futures contract. This would confirm the idea that December corn has moved into a secondary uptrend.

The most interesting thing about new-crop corn at this time is that almost all of the news is bearish, while the charts are set to turn bullish. If price trends reflect traders' opinion on all the factors that affect the market, both known and unknown, then what does a move to a secondary uptrend say about the unknown factors in corn? And how will the commercial side of the market react to this possible uptrend.

Stay tuned.

To track my thoughts on the markets throughout the day, follow me on\Darin Newsom

Posted at 8:23AM CDT 08/15/14 by Darin Newsom
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