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Bryan Doherty: Warning shot

02/25/2011 @ 1:56pm

Often when it comes to marketing, farmers wait until they get enough information to make decisions. However, by the time they get enough information to make a decision, the market has already moved. Therefore, marketing is challenging in the sense that you need to make decisions in front of unknowns. One could argue that the corn market has had a couple significant warning signals in the last two weeks, indicating that upward momentum may be slowing or, in fact, has turned. 

On Monday, February 14, corn futures posted a bearish key reversal and saw follow-through selling the next couple of days. However, a strong come-back on Thursday and then again on Friday of that week, helped to squash this concern. Monday night trade (no Sunday night trade due to President's Day) saw corn prices moving higher. It looked as though the trend was upward. However by day's end, a massive key reversal exhibited itself on charts as prices closed limit-lower. These signals shouldn't be taken lightly.

A bearish key reversal is when the market has a larger trading range than the previous day and closes lower. At the top of a long uptrend a bearish key reversal can often indicate prices are about to change trend. Perhaps more important is that a technical signal can become self-fulfilling. When traders see bearish key reversals, it signifies uncertainty. If you're long at that point, to play it safe, you may exit or move stops under the market to exit. If you have been waiting for an opportunity or signal to sell, you may now take action. Thus the attitude begins to change in the marketplace and the perception may begin to change from friendly to reasons why the market could in fact go lower. Momentum begins to stall and, if prices drop, the prophecy of lower prices after a reversal becomes evident.

It's a long time between now and next fall. Assuming normal-type growing conditions and an increase in acres, it's highly likely that at some point corn prices could drop 25% to 35% of their value. In keeping the math simple, this could mean $6.00 December corn futures bottom near $4.00. Corn at $4.00 would help to generate long-term demand and would be healthy for the market. The question is: Are you prepared if this does occur? 

The bullish argument is strong. While prices can explode, they may also do the opposite of what many think and enter into a longer-term downtrend. It’s hard to outguess future events that could rapidly change prices. Who would have thought just a month ago that Libya would be a major factor dictating commodity prices? The key, is to have a healthy balance of sold grain, yet enough ownership through unpriced expected production and call option strategies to participate in a rally should prices negate their negative key reversals.

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