Corn is going back to the price level of 1996 – Chart of the day (April 2, 2012)

 

In two days, Corn prices dropped 85 cents, or 11.6% of its value. Is the drop the end of the end or the beginning of the end or the middle of the end?

I have traded Corn since 1975 — initially at the Chicago Board of Trade for a division of Continental Grain Company, and then as a private speculator. I trade markets primarily based on classical chart patterns, volume and open interest,  and an appraisal of the conventional wisdom of market participants.

Based on my experience trading Corn, I believe the huge price decline of the past two days represents the middle of a major correction in Corn prices — that this decline should bring prices to $5.10 per bushel (nearby contract) from Monday’s close of $6.43.

Of course, farmers reading this post will object to this prediction, and claim that such a price decline is against the laws of nature and common sense. Yet, ever since I started trading Corn I have observed that farmers represent a population group that get very rich from land prices, all the while complaining about crop prices.

A massive price thrust, such as we experienced on March 30 and April 1, almost always occurs at the beginning, middle or end of a much larger move. Of course, farmers will claim that this price decline is the end of a larger price decline from the August 10, 2012 high. I believe that the thrust will end up being the middle point of a price decline from last Fall.

The quarterly chart shows that Corn is still historically high priced. Remember, the free market is not obliged to provide farmers with a perpetual bull market. A likely stopping point for this decline would be $5.10, the 1996 high and the 2012 low.

4.2_ZC_quarterly

The weekly graph better identifies the support levels of $5.75 and $5.10.

4.2_ZC_weekly

The daily chart is the one I find most interesting as a chart trader. Note that the price thrust of the past two days gapped through an important support line at $6.70. There is no question but that the April 1 gap has significance. The question is whether it is an area gap, an exhaustion gap, a measuring gap or a breakaway gap. These are the four different types of gaps that can occur on a price chart.

4.2_ZCN_daily

I do not consider the April 1 gap to be an area gap, because the price gap was clearly outside of the most recent congestion zone.  Area gaps occur within a broader price consolidation. I also do not consider the April 1 gap to be a breakaway gap because seven months of price decline preceded it. This leaves us with the options of a measuring or exhaustion gap.

I vote for the measuring gap. An exhaustion gap most often occurs at the end of an existing run-away trend. Corn prices have drifted sideways for the last three months. A measuring gap, in contrast, often occurs at precisely this stage of a bear trend.

Measuring gaps most often mark the “half-way” point of a bear trend. If the April 1 gap is of the measuring variety, the “measured” target is $5.10, incidentally a point of importance on the weekly and quarterly graphs.

There is one other factor that would support the hypothesis of the measuring gap — and that is the price relationship of Corn to Soybeans and Wheat. The ratio of Corn prices to the prices of Soybeans and Wheat dictate the planting decisions of farmers and the consumption decisions of users (livestock feeders). As the charts below show, Corn is coming off a period of extreme over evaluation in relationship to Wheat and Soybeans. It is difficult for me to believe that this extreme over evaluation is ending with an exhuastion gap in the price of Corn. In fact, the ratio charts would bettter argue for the April 1 gap to be a breakaway gap.

4.2_ZS_ZC_quarterly

4.2_ZW_ZC_quarterly

From a trading standpoint, I am short Corn and want to add to the position. However, Corn prices have dropped too far too fast, and a sharp correction could (but does not have to) occur at any time. July Corn could rally to $6.60 to $6.70. Especially if such a rally develops this week, increased short position exposure would be my call.

Markets: $ZC_F, $ZS_F, $ZW_F

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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