Hello and welcome back to CRI's CTS Spotlight,
10/07/11: As we approach the US Dollar's upside target many of its trading pairs are starting to look washed out. No new up trends have been established over the past few weeks suggesting the malaise that has blanked the broader commodities market shall continue for at least a little while longer. Of particular note this week, Corn and Oats have finally joined the rest of the grain markets in a general correction that looks to be long overdue.
One by one, the bull markets in the commodities are reversing. Here then is the latest commodity to break bearishly - Corn. Considering Corn was less than $1.50/bushel when I started to learn how to trade commodities back in the early 1990s, one could easily say that this market has come along way. What were once astronomical prices are now considered normal - can this kind of food/staple inflation continue? Or do we put in a top and spend the next twenty years working our way back down. Only time will tell, but one does have to respect the fact that this is historically a very expensive market.
The fundamental argument for higher corn prices has always been about growing world demand. As our population grows, so too does the demand for raw food commodities like Corn. Couple this with the addition of government subsidized competition from the Ethanol industry and one can see how prices have tripled since the turn of the century. From the supply side, we have been fortunate for the fact that yields have also grown at a remarkable rate too. While 100 bushels per acre was normal before the turn of the century, today we produce well above 135. So given these underlying fundamentals can one justify prices more than doubling in the last year? And furthermore, can one justify prices continuing to grow from there? Unfortunately, I don't believe so. Yes, price pressure will remain strong as we work our way through this 17.5 year commodity cycle. But yearly gains like we have just seen certainly can't be sustainable. It all comes back to the old saying, 'nothing cures high prices - like high prices'.
Ironically enough, I don't think the run-up or this subsequent run-down in price has much to do with corn fundamentals at all. I believe that the market moved higher through QE2 (the reflation of the world economy through 2009-2010) and is now going through the hangover of the Fed. taking the proverbial punch bowl away from the party. Considering how broad based the fall in prices has been, it is hard to point to one specific piece of news that is deflating commodity prices. People are running out of all risk assets and into the US dollar. And if that we not enough, commodity prices we follow are traded in US Dollars which means that at the end of the day prices have to be lower (if the underlying currency is stronger) just to stay the same.
So corn, like so many other commodities, has entered its correction phase after a serious run up in price. With the break of the early July low 0f 616, the market has established a very well define double top price pattern. Additionally, this same break confirmed a head and shoulders top too. This is a massive topping patten where stops on short positions should sit just above resistance near 765. It is so much risk that I doubt many would actually do the trade. If we got a rally up into that resistance area and failed I might take a serious look at a Put option but for now I am flat and watching. For those that are short (or can get short) the gap at 563.5 and a one year 50% retracement of 561.75 shall represent short term targets. The 'support zone' highlighted on the chart should see some demand come in but If the global economic situation doesn't improve into the end of the year, one could see a realistic test of the head and shoulders target of 433 into the early 2012 export driven market.
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSIthe_rational_investor@yahoo.com
http://www.the-rational-investor.com
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