Technically Speaking

Grains: Reversals of Fortune

Dec corn was just one of the grain markets showing a reversal pattern at the end of last week. (Source: DTN ProphetX)

As I mentioned in my On the Market column this past Friday ("Looking Behind at the Road Ahead"), I'm a technical analyst at heart. Dating back to my early days as a young commodity broker, I've been fascinated with studying patterns on charts. In his book "Outliers", Malcolm Gladwell discusses the 10,000-Hour Rule, the idea that it takes 10,000 hours of doing something to master a skill. I'm not saying I've mastered the study of trends, but I passed the 10,000-hour mark looking at charts decades ago.

One of the first things I did after obtaining my Series 3 commodities license was buy John J. Murphy's book, "Technical Analysis of the Futures Markets", the 1986 edition. The book is showing tremendous wear and tear from years of constant use as I quickly refer back to things I see developing in the markets.

This past week in grains had me rereading one section in particular, the part that talks about reversal patterns.

Reversals are points on a chart when market direction changes. Sometimes they are easy to see, like the common double-top (DT) or double-bottom (DB). The basic characteristics of a DB are simple: 1) In a downtrend, the market posts a new low. 2) The market then posts a rally on lower trade volume. 3) The next sell-off tests the initial low, but doesn't penetrate it before rallying beyond the interim peak.

Last week saw the old-crop July corn contract post a low of $3.48 1/4, a test of its contract low of $3.46 3/4 (week of September 29, 2014). Similarly, the new-crop December contract tested its contract low of $3.64 1/4, posting a low of $3.65 before rallying to close at $3.78 for the week. Both are showing potential DB formations, needing rallies beyond the interim peaks to finish off the pattern. For the December contract, that means a move beyond its December 2014 high of $4.40.

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Another familiar pattern is the simple bullish (or bearish) reversal. By definition (pgs. 94-95 of Murphy's book) all that is required is a contract move to a new low before rallying back above the previous period's (day, week, month; depending on your study) high and closing higher. It is the last characteristic where there is disagreement among technical analyst with some stating the close has to not just be higher, but above the previous week's high. I've always used a higher close for a bullish reversal (lower close for a bearish reversal) and will continue to do so.

Not only did December corn put itself in position for a possible DB, it also established a bullish reversal last week. As stated above, the contract posted a new low for its secondary (intermediate-term) downtrend of $3.65 before rallying above the previous week's high of $3.80 (posted high last week of $3.84 1/2) and closing higher for the week ($3.78 versus $3.68).

A variation of the common reversal is a key reversal, where the contract (market) makes a new low (or high) before changing directions. November soybeans hit a new contract low of $8.96 3/4 prior to rallying back above the previous week's high $9.13 and closing at $9.14 1/4. Note that not only was the weekly close higher (up 8 1/2 cents from the previous week's settlement) it was also above the previous week's high, satisfying both camps of technical analysts.

I should also mention that the last major (long-term) patterns on monthly charts for both corn and soybean futures were bullish key reversals last October, with both fulfilling the criteria of closing above the previous month's high of $3.67 1/2 ($3.76 3/4) and $10.38 ($10.49 1/4) respectively.

Another pattern I look for is the 2-week (day, month, etc.) reversal. In this case the contract (market) posts a new low for the existing trend and closes near the low. The next week (day, month) sees the contract open near unchanged before rallying and closing near the next week's (day, month) high. Let's look at July corn again. The previous week saw the contract post a low of $3.48 1/4 before closing at $3.51 1/2. Last week July corn opened at $3.50 1/2 before rallying to a high of $3.67 1/4 and closing at $3.60 1/2.

Some might argue that the close isn't close enough to the week's high to establish a 2-week reversal. Here's where we can bring in other technical indicators, most notably stochastics (a momentum study), to provide additional information. Weekly stochastics for July corn established a confirming bullish crossover below the oversold level of 20%, a pattern that usually indicates momentum has turned bullish and that the secondary trend on weekly charts has turned up. Also, trade volume increased last week, another characteristic to look for with a reversal pattern.

The DTN National Corn Index (NCI.X, national average cash price) also looks to have established a 2-week reversal. The previous week saw the NCI.X post a low of $3.31 and close at $3.33. Last week the NCI.X opened at $3.34, rallied to $3.45, and closed the week priced at $3.42 (the previous week's high was $3.37). And as with the July futures contract, weekly stochastics posted a bullish crossover below the oversold level of 20%, confirming the market's reversal pattern.

Those of you reading along may have noticed no mention of any kind regarding wheat, wondering if it wasn't an island unto itself in this sea of reversals. If so, you aren't far off. The DTN National Soft Red Winter Wheat Index (SR.X, national average cash price) was already in a secondary uptrend from a bullish reversal the week of May 4. However, the week of May 26 saw the SR.X leave a bearish price gap between $4.82 and $4.67. Last week the SR.X rebounded, creating a bullish price gap between $4.67 and $4.68. This could be viewed as a bullish island reversal within an existing secondary uptrend.

Questions might also be asked of wheat futures. As with the SR.X, July Chicago and July Kansas City futures contracts were already showing secondary uptrends on their respective weekly charts. Last week saw both trade outside previous week ranges before closing higher for the week. These patterns could be viewed as bullish outside weeks indicating secondary uptrends were set to resume. July Chicago wheat also posted a new 4-week high, yet another technical signal that I look for to possibly confirm a change in trend.

A couple of final notes: First, the recent rally in the U.S. dollar index (USDX) has not erased its secondary downtrend. The USDX is seeing a minor uptrend that should continue to meet resistance near 97.973. When the USDX starts to trend down again, its downside target remains 93.236, grains could see increased buying interest, most notably noncommercial short-covering, tied to this move. Also, this coming week has another round of USDA monthly Crop Production and Supply and Demand reports scheduled. Given the basic technical analysis tenet that market action discounts everything (pg. 2), I find it interesting the grain complex turned technically bullish before the release of these reports.

Stay tuned.

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

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