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Blow-off top, or a bull market correction?

Agriculture.com Staff 10/11/2006 @ 9:07am

Grains have had an explosive week of price movement, with 62c gains in wheat Monday (on synthetic options), 20c corn, and 10c soybeans. The markets followed this upside explosion with 25c losses in wheat and 14c losses in corn/beans yesterday. How's that for market volatility?

Whenever volatility explodes like that, usually we look for some type of topping action in the market. While wheat can top anytime, we show we have high enough prices to allocate out the short 2006 world crop. For corn and soybeans, harvest would be an odd time to top these markets. Typically, harvest is when lows are made in markets, not highs. Yet here we are Monday with the highest price of the year for corn (higher than Aug 1, when the crop was at least 10 bu/acre smaller than the crop is today!).

The explosion Monday was triggered by the same hot/dry weather in Australia over the weekend that has plagued them all year. Weather forecasts weren't much better, continuing to call for more hot/dry weather the next 2 weeks that pretty much would seal the Australian crop's disastrous fate. Today weather forecasts in Australia continue to call for only light rain in less than 10% of the wheat area over the next week, and 20% coverage of light rain in week 2. Basically more of the same hot/dry weather.

Argentina (the other growing wheat crop) is forecast to get good rain coverage this week again, improving soil moisture and wheat prospects again for the third straight week. So, while the Australian drought rages on, the Argentine drought has effectively ended. This offsets part of the bullishness of the Australian crop disaster, but certainly not all of it.

While the gains Monday were obviously overdone, still most grains (wheat, corn) are higher for the week, with only soybeans dropping below Friday's closes as of Tuesday evening. If markets close lower for the week, we might have a potential top in the market, as we'd form a downside reversal for any market that finishes lower (new recent highs Monday in all markets). That means an additional 6c loss in corn could also indicate a potential top in the market.

For wheat, though, much more weakness needs to be shown than yesterday to form that conclusion (especially CBOT old crop wheat). We do have some negative technical formations in wheat with both KC and Mnpls Dec futures forming downside reversals yesterday, but wheat is notorious for not following through on such formations. Besides, Chicago Dec has clearly been the leader in this rally, so we need a reversal there for the week to consider yesterday's trade-topping action. It will take 37c losses the rest of the week to push Chicago Dec into a weekly downside reversal.

Note that new crop futures, however, look like they might be turning the corner to lower with huge losses yesterday (nearly limit down in KC and Chicago) as beneficial rains fell in 85% of wheat country the past 2 days (.25-2.5", locally 2"). There's no doubt that US winter wheat crops are in much better condition this fall than average (or last year).

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