Corn, Ethanol and Feeders Provide Signals
Two weeks ago, we wrote about the head-and-shoulders pattern present in December corn futures, which is now a fortnight on. Looking at the December corn chart, we can see the formation is still alive, albeit a bit sloppier than technicians would like to see it. After the rally to $4.64 3/4 on July 15 -- which could be deemed the right shoulder -- prices have been trending lower and toward the neckline between $4.20 1/2 and $4.25. It looks increasingly likely that December corn futures will trend lower toward the $4.20 1/2 corrective low from July 2 and possibly even try to fill the gap from May 24-25 at $4.20 to $4.20 1/2.
If the neckline is broken, the textbook says sharply lower prices would be expected straightaway with some downside targets as low as $3.70. We will be watching momentum indicators especially close as we near the $4.20 1/2 corrective low for any sign the downtrend is slowing or possibly getting ready to reverse. At the moment, the stochastic measure of momentum is headed swiftly lower with no signs of divergence.
As one might imagine, the technical setup in ethanol prices is very similar to that of corn with a loose head-and-shoulders pattern portending lower prices. After the rally to $1.602 on July 15, spot ethanol prices have given back over 8.0% of their value with price having pushed below the 50-day moving average for the first time since mid-May. The 100-day moving average is below at $1.416 and the 200-day at $1.349. The 100-day moving average resting at $1.416 is an interesting level considering the 100% Fibonacci progression of the $1.645 to $1.461 sell-off from the $1.602 corrective high on July 15 measures $1.418. We would expect this level to provide some decent support, although one should never count on derived levels like those from Fibonacci progressions/retracements or moving averages to stand in the way of a healthy downtrend. Momentum indicators are not suggesting anything in the way of a divergence at this time.
Sticking with the corn theme, feeder cattle prices have traded in somewhat of an inverse to corn the last two months, as would be expected. With corn putting forth a head-and-shoulders pattern, feeder cattle have somewhat of an inverted head-and-shoulders pattern. To be clear, it is not a textbook pattern, nor does it have to be.
After bottoming on June 24, August feeder prices have trended mostly higher and back above the 50-day moving average. That rally attempt was stopped right at the 38.2% retracement level of the $161.40 to $130.95 sell-off at $142.58. The weaker trade since hitting that retracement has flattened all momentum indicators as those trend lower with price. We will be watching any recovery attempt to see if the July 11 corrective high is taken out and whether it is done with higher highs or lower highs on momentum indicators. If price is able to take out the July 11 corrective highs, but does so on lower highs in momentum, we would have a classic bearish divergence in momentum and a sign this market is not meant for higher prices. As is usually the case, corn prices should have a lot to say about feeder cattle prices in the coming weeks.
Tregg Cronin can be reached at email@example.com
Follow Tregg Cronin on Twitter @5thWave_tcronin
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