We've been writing about the potential head-and-shoulders (H&S) patterns across the ag complex the last several weeks. In hindsight, we can see close to textbook examples of these patterns as most will see in live trading. Looking at December corn specifically, many were quick to write the H&S pattern off when the intermediate-term rally took us to $4.64 on July 15. However, after that brief surge, December corn resumed the downtrend and crashed through the neckline at $4.20. Snapping the price progression from the head at $4.73 to the neckline at $4.20, and projecting the move downward, we see a $3.68 to $3.70 price objective. That sort of price projection would be the scenario if the pattern worked out perfectly, but as we've seen, rarely do these patterns follow the textbook. December corn is turning sticky around the 61.8% retracement of the entire $3.63 to $4.73 rally at $4.05. Momentum indicators are not yet indicating a bullish divergence with price but bottoming action is occurring, which is usually a precursor to such a divergence. Bulls have an incredible amount of work to do to stem the bearish onslaught of the last several weeks. In our view, December corn would need to recover back above at least the $4.30 level from July 29 to flip scales back higher and argue a longer-term bottom is in place.
In similar fashion, December Chicago wheat has a confirmed H&S pattern after price broke the $5.10 neckline two weeks ago. The price projection for this contract would be something around $4.56 if it is executed perfectly, revisiting the May lows. The big difference between December Chicago wheat and December corn would be momentum, with wheat showing a much closer divergence pattern to price than its corn counterpart. Momentum has made higher lows while price made lower lows. To confirm this bullish divergence in momentum, we would need to see trade back above the $5.12 to $5.15 from July 25 to July 29. That said, it is important to remember that trends on all applicable scales are down and should be expected to continue until or unless wheat can recover back above a prior corrective high. This is why technicians speak of potential divergences in momentum versus confirmed divergences in momentum.
The H&S pattern in November soybeans is definitely the sloppiest of the three, however, the price action behind the pattern is the important thing to focus on. In other words, price made a thrust to new highs at $9.48 on June 18 before a sell-off with a recovery attempt at $9.36 on July 15 failing well short of new highs. This last-ditch recovery attempt is often described as a "bull-trap" as it lures weak longs into the market who believe the prior price action was corrective ahead of a round of new highs. In reality, the recovery attempt and correction was simply a continuation of the downtrend as new lows lie directly ahead. Because of the somewhat sloppier nature of the H&S pattern in soybeans, a price projection or target is a bit more ambiguous. By our eye, we would see a price projection around $8.32 give or take five cents if this pattern is confirmed perfectly.
Tregg Cronin can be reached at firstname.lastname@example.org
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