Technically Speaking

It is hard to believe that the end of January is already upon us. Tomorrow (Saturday) the calendar page turns to February, Sunday brings us the over-hyped and discussed to the point of nausea Super Bowl, and more importantly Punxsutawney Phil's annual weather forecast. Just my opinion, but given this winter's series of Polar Vortexes, ol' Phil might just bite the hand that reaches in to drag him out of his nice, warm burrow.

As for the markets, the leader of the grain pack has quietly positioned itself for a major (long-term) change in trend. Take a look at corn's continuous monthly chart, and you'll notice that the last few months have seen a consolidation pattern emerge. If you look closely, the low of $4.06 1/4 was posted in January, with the nearby March rallying to a high of $4.35 1/2. As Friday's session gets under way, the question will be if the March can somehow climb above the December high of $4.36, establishing a major key bullish reversal.

Just a reminder, a key bullish reversal occurs when a contract moves below the previous period's (day, week, month) low, rallies to take out the previous period's high, and closes higher for the period. And if it occurs on the monthly chart it indicates the major (long-term) trend should turn up. You can see one of those if you trace your finger back 32 months to June 2011. Yes, the corn market rallied to a new high of $8.43 3/4 in August 2012, but the technical stage had been set for a sharp sell-off the year before.

In conjunction with the possible key bullish reversal, monthly stochastics (second study) below 20% are indicating the market is oversold. As the nearby corn contract continues to consolidate, and possibly build upside momentum, monthly stochastics could confirm a bullish technical price pattern with a bullish crossover (faster moving blue line crossing above the slower moving red line, with both still below 20%).

If all this occurs, and the January 2014 low turns out to be the long-term low, the initial upside target is near $5.52, a price that marks the 33% retracement level of the previous major downtrend. Note that this target is also near an old pocket of monthly lows seen in both May 2012 ($5.53 1/2) and June 2012 ($5.51). Just a sidenote, from a technical point of view, the corn market should have fallen at that point but rallied on weather (fundamental) concerns.

Speaking of fundamentals, the market is indicating an increasingly bullish view of supply and demand as the nearby futures spread (third study, green line) is trending up. The carry in the March to May spread has been whittled back to about 6 cents, with the May to July (not shown) at only 3 1/2 cents. The weaker this carry gets the more bullish the commercial outlook for corn is, providing more support to a potential rally.

Ultimately, if an uptrend is to gain strength, noncommercial traders will need to participate. This groups net-short futures position (bottom study, blue histogram) continues to be covered, meaning investment traders have been buying during this consolidation phase. If they move to a net-long position, both sides of the market would be considered neutral to bullish.

But what if the March contract doesn't take out the December high Friday (January 31)? Given the other factors discussed, at worst it should indicate the market is in a sideways trend, putting bullish technical signals on hold rather than erasing them completely.

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Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.