Fundamentals trump charts
In my "Marketing 101" workshops, I tell audiences that a big change in fundamentals can offset even the most reliable technical signal. The government report today proved my point probably as well as any time I have been a market watcher. The corn futures chart showed a classic double top following three distinct gaps on the way up. That is a clear topping sign in almost any book on charting. Looking back I was unhappy that I did not sell corn when prices broke down below the trend line.
In retrospect, I am glad that I did not follow the technical signal. Being on the short side of the corn market on Friday would not have been a pleasant experience. The big bullish factor was the reduction of the corn carry over by 183 million bushels from being already tight. That is a reduction in stocks of 20%, when the projected supply was already small. Corn futures reacted by being locked limit up most of the session.
Soybean prices were propped up by the bullishness of the corn market. If I understood the report correctly, soybean numbers were not especially bullish. Projected carry over of 575 million bushels is historically very high. Worldwide oilseed stocks are at record levels. There is plenty of competition for export sales of oilseeds. Traders looking for something to buy when locked out of the corn market turned to beans and wheat, even though the situation is not nearly as bullish for those grains.
When technical systems fail and fundamentals change suddenly, it is tough to know what to use as a selling trigger. Cash flow and relative profitability are tools, but in this situation it is easy to pull the trigger too soon and leave a lot of dollars on the table. Farmers who sold cash corn for $3.00 because they had a good crop and had good cash flow at that price are probably kicking themselves after Friday's action. They may still prove to be right, but today it does not look likely.
My seasonal charts sometimes indicate when there might be a big move ahead. If the market goes dramatically against the seasonal trend, many times that tells me that a big move is under way. Last fall when corn futures rallied the last half of September and early October, it was a sign to me that something unusual was happening. Corn futures do not normally make big moves during harvest. So much price improvement at such an unusual time caused me to lift the hedges I had placed in July futures. I was reluctant to do so at a loss, but the action avoided 82 cents in margin call pain-and I still have my cash corn. I learned this lesson in 1995 when I sold my cash corn at $3.00, only to see it go to over $5.00 by the following summer.
On the other hand, soybean futures have followed the normal seasonal pattern very closely until Friday. The post harvest bounce went about 50 cents higher than normal, which leads me to think the pull back in the winter might be less than normal. Traders look at the possibility that exceptional corn prices will lead to many acres being switched to corn from soybeans, consequently soybean prices, especially for the 2007 crop, are being supported at a higher price than the fundamentals would indicate.