What’s Next for the Golden Grain?

By Jim Barrett of Lind-Waldock

It's been a golden time for the golden grain. Corn has rallied more than 60% this year and rose to a two-year high above $5.90 a bushel in early trading on Monday, November 1. While the market closed lower on the day, I don't think corn's bullish trend is quite over yet. There has been a good deal of speculation that the USDA's next official crop estimate (out November 9) will be lowered further after it was trimmed back in October.

A sharp move in wheat offered inspiration for a move in corn off its July lows. Wheat was rocked out of complacency about US stock levels by terrible weather in the old Soviet Union. Record summer heat and fires created some big price spikes.

The rally in corn gained steam even as wheat faded, from a spectacular spike up to $8.60 a bushel this summer as hot and especially dry weather in the US eastern cornbelt got end users nervous and speculators excited. A curveball was thrown at early bulls in the surprise September 1 stocks report, which caused a nasty spike down.

However, the damage presented an opportunity for the bulls as the market quickly traced out a major double bottom and lifted strongly before the considerably more important September production report. The bulls had it right, and a major gap resulted after the USDA dropped yield projections by an unprecedented six bushels per acre.

Technical Picture

Unlike wheat, the corn market so far has not rejected highs in a major way. The downside gap has not been filled, and with the next monthly crop report due in a week's time, it's possible it might not be—at least not anytime soon. You can see the gap on the chart below.

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We've seen near-record open interest and record speculative holdings in corn. Swings have been dominated by outside markets as much as any particular news related to corn. The market has traded in a normal fashion in that higher starts tend to fizzle out and fall back, and lower starts get bought, even though recently, exports have softened a bit. Action in the US dollar and gold (especially in overnight trading) is whipping price action in corn around, but I think the key underlying bullish structure is intact at this point. 

Skeptics wonder who is left to buy as bullish fundamentals are clearly well known and end users have gone a long way to cover long-term needs. The key thing to monitor from a technical perspective is whether retracement levels continue to hold.

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Long positions initiated against definable retracement areas have been successful, while lunging on higher opens has clearly not been. A low close since the gap up occurred October 18, which acted as a stress turning point in the short term (the bulls backed off wondering whether or not the market wanted to fill the gap, and bears pressed on thinking it would). We can use this point to analyze action since then. You can see the 50% retracement (in black) and the 61.8% retracement (in red) on the 90-minute corn chart below.

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The last two trading sessions, in which support tested and held and the market pushed to new highs but then corrected are micro examples of behavior during the last few weeks and are likely to be repeated in the next few weeks. However, progress in recent days has been somewhat spotty. The market has grinded higher, but new highs on Sunday night and in the November 1 session had the rug pulled from underneath as the market closed lower that day. Failure to build gains further this week will likely mean the market is still in a normal trading range, which could be the case until November 9.

Remember, we are not running out of corn quickly—or at all. However, the market needs to ration relatively tight supplies and can best do so with the type of elevated ranges we have now. The market also must fight for acres with soybeans next spring, and therefore, it’s likely to hold most of its gains as long as bean exports remain strong. Remember, the government has also given green light to more ethanol, and so an extended period up at these elevated price levels seems very likely. The danger for shorts is made perfectly clear by example of other agricultural markets with tight world carryovers, namely cotton and sugar.

The major adjustment has probably occurred already, and a further grind higher is certainly possible or even likely into 2011. However, I don't see an upward explosion likely. So watch where you choose to enter the market. Please feel free to call me if you have any questions about this market or others, and to develop a customized trade strategy for your unique goals and risk tolerance.

By Jim Barrett of Lind-Waldock