Is the grain market running out of gas, analyst asks
Are the corn and oilseed markets running out of gas?
That is, have they reached their price peak or are they close to a peak? Are new bullish factors lacking to keep prices supported?
Market analysts and traders will watch the market very closely in the days and weeks ahead as prices, in particular due to this week’s bearish key reversals posted on Monday, which may have posted a topping signal.
A bearish key reversal is a technical signal that illustrates a trade session in which new highs were posted and the daily range was larger than the previous day. The bearish part of bearish key reversal is that prices finished lower in the day or session (whichever time period you want to use; some use weekly or monthly charts).
Technical analysis is often said to be more of an art than a science. There may be multiple chart signals that traders use. Some also believe that technical indicators reflect fundamentals (supply and demand), as these variables are factored into the daily trade.
Others may believe that technical analysis provides little help in determining price direction and, ultimately, it is supply and demand factors that determine price.
The price of a commodity is always dynamic, which implies it is ever-changing. Sometimes the changes are minuscule from day to day, while other times exaggerated. Technicians will often take a signal they believe in and base their trading decisions off this signal. Some utilize a combination of technical signals before deciding to trade or develop a price forecast.
It is this author’s experience that the use of both technicals and fundamentals can help guide direction. As an example, since August, both the corn and soybean markets have experienced significant drawdown and carryout. In round numbers, corn carryout was near 2.7 billion bushels in mid-August and is now 1.7 billion. Soybean carryout was near 450 million and is now at 190 million. These are fundamental developments that have supported prices. Using a technical indicator to help the timing of trade/sales is the next step.
Since mid-August, prices have remained in a staunch uptrend, until perhaps this week. Lower yield, increased exports, and dry weather in the western half of the U.S. and elsewhere in the world are fundamental factors reducing supply or perceived future supply. The bearish key reversals posted look very prominent on price charts, a signal that’s hard to miss. It is challenging to believe the market will dismiss these signals, at least in the short term, which potentially suggest price tops could be in place.
The combination of declining positive fundamental news and now negative technical signals should not be ignored by farmers holding inventory. Yet, be very careful of technical signals. They could mean little if the market negates their meaning. As an example, if prominent bearish key reversals failed to muster much selling interest and the trade eventually pushes into new highs, then the signal means little. If, however, selling interest develops and there is follow-through, then these signals matter, potentially in a big way. Put another way, the handwriting is on the wall. Reversals on Monday were followed by lower markets – not a near-time sign of price strength.
When combining both fundamental and technical analysis in the corn and soybean markets, prices have made a substantial rally, and it will take more friendly news to drive prices higher. This news could be lacking.
Most recent forecasts suggest increased rainfall for South America, which has been dealing with pesky dry conditions all fall. It may be easy to ignore technical signals when the trend is straight up, as it has been the last three months. Yet, as a producer, you are an inventory manager. Keep alert to these signals. Let them help guide you in your decision process. Fundamentals can be the driving force of market direction and technical signals the instrument for timing of sales or purchases. In this case, a bearish key reversal after a strong rally suggests cash sales are warranted so that you can keep your pay raise, especially after the risk you took holding it to capture a price rally.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 444.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.