Monday, July 23, 2012

Market Comments - 7-23-2012 - Key Reversals on the Charts? Top in for Grains?

The grain markets closed weaker today behind a very volatile trading session; lead weaker by beans, some wetter forecasts, and weak outside markets.

Corn closed down 10 cents, beans where off 64 cents after trading limit down at one point during the session, KC wheat was off about 27 cents, MPLS off 26, and CBOT wheat was down 31.  Outside markets had crude down over 3.50 a barrel, gold off 7.00 an ounce, the equity markets weaker with the DOW down 101 points, and the US dollar made new calendar year highs today.

So was today just a pause before going higher on the grains? Or was today it?

I don’t know and as always all I can really preach is good risk management and doing things that make one comfortable whether our markets go up, go down, or chop around sideways. 

The market has left us some different clues as to what the future may hold; but we are not going to be able to outguess with all of the factors effecting prices on a consistent basis; nor do we recommend anyone trying to out guess the market; after all that is why it is called the market and is a price discovery system; a very volatile one at times; but nonetheless a price discovery system.

Some of the clues the market left today are both bullish and bearish.  The bullish side of things; is the fact that each day our crop has got smaller and for many areas it is too late for some of the crops.  Yield estimates for corn are falling each day by virtually everyone in nearly every area.  So just because supply is so unknown and we have previously built up such strong demand prices potentially have no limit as to where they could go.

So there is the most bullish thing we have; the unknown factor or fear of not enough supply factor.  We do have to have our prices get to the spot where end users are not using the same amount they would have if our prices where say 5.00 on Dec corn; as we simply don’t have enough product to meet the “normal” demand. 

Until we really can put a solid figure on supply it is hard to determine if we have curved enough demand and until that happens many in the industry feel the only place to go is up.  Goldman Stachs had a corn price target of 9.00 today and many have been talking about 10.00 or higher corn. 

These projections hitting the headlines are also one of the reasons to be a little cautious; and lead to some of the bearish clues we have seen.  Typically when Wall Street starts talking about prices going higher the top is soon; after all take 2008 and crude oil when it was near 150; I think nearly all the forecasts where for 200 crude; not 30ish like it happened to be just several months later.  Everyone get’s bullish at the top as that is when all of the bullish information is known; but what also happens is there comes a spot when you need to feed the bull so to speak or when everyone that has bought or sold a market already has.

A couple technical red flags if you will did happen today; Dec corn traded to a new high of 8.00 and closed lower leaving an outside bearish day along with key reversal as it touched the 8.00 level that capped the market last year as well as in 2008.  Some of the wheat markets and their charts also left key reversals and outside bearish days.  The key reversal is when we make new highs for the move and close lower and the outside bearish day is when we take out the previous sessions high’s and low’s while closing lower.  Both strong technical signals that we perhaps reversed. 

Another bearish warning sign has to be demand; most corn bids rolled to the Dec at no spread.  I still have ethanol plants trying to sell me back corn as they have slowed their grind.  The profit portion for corn end users isn’t exactly great as no one can make much if anything at these levels.   Does it mean we can’t go higher; no but I don’t see a picture in my mind that doesn’t involve ethanol plants going either belly up or at the very least shutting down for an extended period of time.  Which is scary because we could very easily curve demand more then we have cut supply.  I doubt it; but very possible and historically it wouldn’t be a first.

The US dollar making high’s for the year after gapping higher on Sunday night is also a little caution flag for the grains.

Bottom line is continue to get yourself in a comfortable situation whether or markets go up, go down, or chop around.

If you need some help with your risk management please feel free to give us a call.


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