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End of the rally?

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Some corn and soybean charts flash warning signs that the historic 2020 rally could be ready to cool.

Profit-taking at the end of the month following a big rally isn’t unusual. But Monday’s losses in corn and soybeans raised concerns over whether these gains have legs.

At least that’s the perspective offered on price charts followed by so-called technical traders.

Whether they’re true believers or skeptics, there’s no doubt a lot of folks watch charts for clues about where markets are headed. Whichever camp you side with in the debate over the merits of technical analysis, it’s time to pay close attention. Even if you scoff about their power, these patterns have a way of becoming self-fulfilling prophesies if enough of the market’s buyers and sellers follow along.

Indeed, some corn and soybean charts are flashing warning signs that the historic 2020 rally could be ready to fade, or at least cool off for a bit. Here’s what the tea leaves may be saying when viewed from the perspective of daily and weekly technicals.

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Corn loses steam

December corn went into delivery Monday by suffering a key reversal lower, potentially a powerfully bearish signal. Futures made a new contract high during the overnight session but couldn’t hang on to the gains, trading below Friday’s lows before settling lower on the day. A similar patter showed up on the chart for March, the new nearby contract.

Corn is still in an uptrend. But key support on daily charts is near. The March corn uptrend off August, September and October lows comes in right around the 25-day moving average of $4.195. A break below those lines could trigger more profit taking.

Momentum indicators also point to the corn rally getting long in the tooth. While corn futures made new highs in November, the Relative Strength Index did not, falling from overbought levels. This is known as divergence, and it’s another bearish signal.

Monday’s spike also raised red flags on longer-term charts. December futures couldn’t hold a brief move over the 78.6% Fibonacci retracement of its move from the June 2019 highs to the April lows on the weekly nearby continuation chart. Fibonacci targets use a numerical sequence developed by a medieval Italian mathematician.

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Soybeans flirt with targets

The daily January 2021 soybean chart is also flashing some warning signs. Futures ended November with an outside day lower on Monday. That is, Monday’s high and low exceeded the price range from Friday. Despite multiple challenges the November rally also couldn’t close above the top of a channel drawn off August and November lows. Those lows matched tests of the 25-day moving average, which is providing support down around $11.25 this week.

One potential sign of a market top in soybeans comes on the back-adjusted weekly nearby chart. Back-adjusting tries to smooth out distortions that occur on long-term charts when a futures contract is rolled from one nearby contract to the next. These rolls can be especially large when the nearby chart moves from old to new crop, though carry from one month to the next can also be significant. Back-adjustments add or subtract the difference between the two contracts.

For example, the June 2016 high on the normal soybean continuation chart is $12.085. That’s the price futures actually reached.

But when the nearby chart is back adjusted, the high increases to $14.345. This year’s rally off the April back-adjusted low of $8.2575 topped out at $12 last week, less than two cents from the 61.8% Fibonacci retracement, a place rallies have sometimes stalled before.

That $12.085 high from 2016 also matches a key Fibonacci projection of 261.8% of the range from the December 2019 high to the April 2020 low. This is another indication that last week’s $12 high reached close to some rarified territory.

Buyer beware

When it comes to technical analysis, remember there’s nothing truly scientific about this method of predicting price movements. But even if you don’t accept it as gospel, looking at price charts at the least provides perspective of how current markets compare to the past.

Remember the children’s story The Emperor’s New Clothes. A vain ruler believes he is wearing a magnificent outfit, and at first, everyone goes along with him. Then, of course, a child points out the truth: The emperor is naked.

Knorr writes from Chicago, Ill. Email him at brycemarkets@gmail.com
The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 
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