Technical Factors and Weather Uncertainty

The opposite reaction to market news may signal a market price top or bottom. Negative market reaction (lower prices) following positive or bullish market news can signal that the market has reached a price high and the beginning of a price downtrend. Likewise, a positive market reaction (higher prices) to negative or bearish market information sometimes suggests that a price low is in place and higher prices may follow.

The higher prices in the days following USDA’s December 9, 2005 supply/demand reports are an example of a positive reaction to negative news. The negative news wasn’t necessarily unexpected. Disappointing exports had led many traders to expect reductions in 2005-06 corn and soybean export projections that were similar to USDA’s revised estimates. However, there were no offsetting changes to other supply/demand numbers. The net result was larger corn and soybean carryovers than most traders expected. Adding to the negative estimates were increases in Chinese corn production/exports and the continued projections for normal South American soybean production. The futures markets opened lower, as expected following the Friday reports, but then prices turned up and closed higher. Sharp price gains also occurred again on Monday.

Why were prices higher in the face of additional bearish corn and soybean supply/demand news? Some analysts thought that grain prices had fallen low enough to "find value" or that they represented "bargain prices" for buyers. However, as the price strength continued, more analysts seemed to believe that the higher prices resulted from "technical buying" and uncertainty relating to South American weather.

The two most common methods of market analysis are usually referred to as fundamental analysis and technical analysis. Briefly, fundamental analysis looks primarily at supply and demand numbers to estimate or project prices. For example, USDA price projections and FAPRI baseline prices are the result of fundamental analysis of supply and demand factors. In contrast, technical analysts look at price action. They use chart formations (trends, etc.) and price calculations (moving averages, etc.) to conclude which direction and by how much prices may move. Technical analysts contend that supply/demand factors are reflected in prices. They also contend that price action often reflects supply/demand changes before the fundamental reasons for the changes are identified. Many large futures traders rely heavily or entirely on technical analysis to make buying and selling decisions.

Following the USDA reports, Friday’s (12-9-05) price action in corn created a chart formation called a "key reversal." Soybean price action almost produced a similar chart pattern. A key reversal may signal a market change. If prices are low, a key reversal occurs when futures prices open lower than the previous day’s close, trade lower than the previous day’s trading range, then move higher than the previous day’s trading range, and close higher than the previous close. Technical analysts explain the action this way: Bearish news initially drives prices lower and the low prices begin to attract buyers who begin to bid prices up. Those who sold early in the day become worried about their short position and start selling, which drives prices even higher. Other buyers also realize that prices may have gotten "too cheap" and begin buying before the "bargains" are gone. This produces a key reversal and a price uptrend often results as the buying continues during the following days, weeks, or months.

The technical market reversal signals were followed by prices that "gapped higher" for corn and soybean futures trading on Monday (12-12-05). A "gap" occurs when futures prices open and trade higher (or lower) than the previous session’s trading range, forming a gap in the price chart. It may signal that something has changed in the market, causing the sharply higher prices. However, gaps are not always a reliable market signal because the markets often "fill" the gap within a few days as price direction turns back down. The combination of the key reversal in corn and the price gaps in both corn and soybean prices provided technical signals that the markets could be changing and prices might move higher.

While technical factors may have fueled a price rally, technical factors also may signal the end of the rally. A strong resistance price level for soybean prices held at midweek. A resistance area (or resistance price) occurs at a charted price level where prices appear to "resist" going higher. Failure to penetrate the resistance level is a technical signal that demand is not strong enough to push prices higher, suggesting the rally is shortlived and the price downtrend may resume.

What fundamental factors might have changed to cause prices to move higher? Market analysts have struggled to identify a number of factors, but most seem to center on early production prospects in South America. It has been dry in Argentina and there have been mixed weather concerns in Brazil where soybean rust has already become a problem in some areas. South American production shortfalls could tighten world supplies and lead to more U.S. exports, which would chip away at the expected large U.S. corn/soybean carryovers and lead to higher prices. However, most analysts agree that it is early in the South American growing season and too soon to expect crop damage or less than normal production.

Technical factors and reports of potential production worries in South America may best describe why the markets rallied following USDA’s bearish supply/demand news. However, unless something really has changed, burdensome corn supplies and large expected soybean ending stocks are likely to limit price gains.

Technical price rallies may offer selling opportunities

Very weak basis and market carry provided market signals to store corn and soybean crops at harvest time. Corn and soybean basis has recovered significantly in most areas, suggesting basis gains may now be in the market. The exception is northwest Missouri where, while some basis recovery has occurred, cash bids remain weak. Futures contracts have retained some of their carry as nearby months expire. The problem is that the downtrends in corn and soybean futures prices have offset much of the basis gains and market carries that were expected to provide storage returns.

The past week’s technical rally in grains may be difficult to sustain and it probably won’t continue if January soybean futures prices do not close above strong chart resistance near $6.05 and the October high just above $6.10 soon. While corn prices may have sent signals that a potential low was established and a downtrend was broken, they will face several levels of resistance and have not yet confirmed that an uptrend has begun. Additionally, without significant news, market action often slows as the holiday season approaches and could make it more difficult to sustain a price rally between now and the end of the calendar year.

Still, the current rally or other technical price rallies might offer some of the best chances to capture those storage returns that the markets appeared to be offering when corn and soybeans were harvested. With basis gains producing stronger cash prices and as January/March soybean futures prices (along with March corn prices) approach September or October highs, profitable storage returns may be earned on stored corn and soybeans. These earlier highs will present strong chart resistance that will be difficult to overcome. Failure to penetrate this potential resistance will be a market signal to sell as prices may again turn lower. If prices penetrate or exceed chart resistance, it would suggest something is changing in the market and produce a bullish technical signal that would target the next higher resistance levels on the chart.

While technical market signals can be useful for helping decide when to make sales, it is important to understand that they can be difficult to identify, easily misinterpreted, and are not always reliable. The market may send a sell signal; such as a failure to penetrate resistance triggering a sale. Following the salle prices may turn around, penetrate the resistance, and continue to move higher. However, if the signal is ignored and prices do continue to decline the sales opportunity is missed. These are among the reasons why it is nearly always a good plan to not sell everything at once, but spread sales and take advantage of what may be a good pricing opportunity on a portion of stored inventory.

The market fundamentals factors of large supplies and increasing carryover suggest higher prices for corn and soybeans will be hard to come by. Production is larger than expected use. Without serious production problems in South America or the emergence of unexpected demand, technical rallies may be about all the market offers before spring.