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Charting 101

Agriculture.com Staff 04/05/2007 @ 1:55pm

Last week, I mentioned that selling immediately after the limit-down move in corn futures was probably not a good idea. One suggestion I had was to wait for a 50% retracement of the move down before making any more sales. Most of you probably understand how retracements work. However, there may be some who do not understand them and how to use them in marketing.

The current corn market offers a good example of this technical tool. I use closing prices rather than the highs and lows for each trading day. I also round off to the next lower cent to make calculations easier. In December corn futures, the high was on February 22 at $4.27. The low on Tuesday of this week was $3.67. That is a difference of 60 cents. The most common retracement is 50%. Take half of the difference of the range of high to low and add it to the low or subtract it from the high. In this case, add 30 cents to the low of $3.67 and get $3.97. That is a logical target for making additional sales following the crop report last week.

As I am writing this, December futures are listed at $3.86, or 11 cents short of the target. There is no guarantee that December futures will reach $3.97. However, price movements since the low day surely look more positive than they did in the middle of the week. There is also no guarantee that the price cannot go higher than 50%, or even higher than the February 22 peak. I looked back over charts of soybean and corn futures going back to 1980. Any time price broke from extremely high levels, there was a retracement of 50% or more. The one thing I can guarantee is that $3.97 is a lot better than $3.67!

Applying the same principle to November soybeans, the high was $8.37 and the low was $7.86. Half of that move is 51 cents. That puts the 50% retracement target at $8.12. The price has already exceeded that level several times. Could this be a reason soybean futures have not been as strong as corn the last two days? Technical signals do not cause the price to do certain things. However, sometimes really strong technicals can become self-fulfiiling prophecies.

Weather note: Two years ago I planted a new rhubarb patch. It came up early this year. I was eagerly anticipating picking a big crop soon. We use it for pies and what is left over makes very good wine. After a low around 18 degrees last night and 24 the night before, my hopes of an early picking are gone. The stuff looks awful! My rhubarb is a disappointment, but I can imagine how farmers with wheat or fruit trees must feel. Any corn that is out of the ground in the south will be especially hit hard. This growing season is not getting off to a very good start.

Last week, I mentioned that selling immediately after the limit-down move in corn futures was probably not a good idea. One suggestion I had was to wait for a 50% retracement of the move down before making any more sales. Most of you probably understand how retracements work. However, there may be some who do not understand them and how to use them in marketing.

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