Technically Speaking

Now Can We See a Correction?

Dana Mantini
By  Dana Mantini , Senior Market Analyst
The chart above is a daily chart of July corn, which has now rallied $2.17 just since March 31. Momentum indicators, which are not by themselves a reason to buy or sell, continue to flash overbought conditions. (DTN ProphetX chart)

JULY CORN FUTURES:

Little has changed in the bullish fundamental reasons for corn's swift ascent to recent new highs. The weather in Brazil's primary safrinha (second-crop) corn areas has remained mostly parched for the last several weeks and the forecast promises more of the same, while export sales are impressive and could move higher, and the interior corn basis has been a rocket shot, as end users seek to secure corn supplies.

However, each market that gets in an overbought or oversold situation will often have some sharp corrections, although they could be only temporary. July corn may be such an animal. If the weather in Brazil continues to be warm and dry, and if China indeed ships all of their outstanding 12 million metric ton (mmt) (472 million bushels) of outstanding sales in this (2020-21)crop year, we can expect stocks to become much tighter, and prices to move even higher. However, with the meteoric rise we have seen, I would venture to guess that much of Brazil's potential losses are priced into the corn market at this point. With a relative strength index (RSI) of 85% and a slow stochastic approaching 96%, the corn market is surely overbought.

This week's planting progress in the U.S. is set to make a big jump, and recent and ongoing rains have been very beneficial for crops. The mostly cool and dry forecast in the western Midwest could lead to a more rapid pace. Funds are net long 372,000 contracts of corn as of last Tuesday, and margins have increased. Old-crop corn could be primed for a setback, but the underlying bullish tailwinds have not subsided, so any break is apt to be short-lived.

DECEMBER CORN FUTURES:

New-crop December corn, on the same path as old-crop July, has now rallied $1.88 per bushel just since the end of March. Speculation is rampant that corn acres are likely to be well above the March planting intentions and planting progress likely to be 70% or more as of Sunday May 9. That is well ahead of the normal pace, while plentiful moisture is falling in many areas. With the potential for Brazil's total corn crop to fall as much as 19 mmt (748 mb) below the April WASDE projection of 109 mmt (4.29 billion bushels), who is likely to sell this market? With RSI and stochastics overbought at 82% and 93%, respectively, December is also in the overbought zone. No sane person would sell this market short. But farmers, facing one of the highest new-crop prices in years, may forward sell, and speculators, looking to cash in, may take some profits.

Don't be surprised if we have another mini setback in the short term. However, with long-term forecasts for the U.S. to possibly face a warm and dry summer, and with U.S. and world stocks moving down, this market is unlikely to break very far.

JULY CANOLA FUTURES:

It is no secret world vegetable oil markets in the past year have soared and have taken a leading role in supporting oilseeds, with palm oil, soybean oil and EU and Canadian rapeseed/canola moving in parabolic fashion to new heights. Perhaps one of the most meteoric rises has been witnessed in the canola market. July canola futures, trading in Canadian dollars per metric ton, has now risen by C$31/mt just since the end of March. Fundamentals will tell you such a move is justified. In addition to cold and dryness in Europe, flooding and labor shortages in Malaysia, tight supplies and strong demand in the U.S., and expanding drought in the U.S. Northern Plains and Canadian Prairies are plentiful reasons for the historic rally in veg oils. Also, just last week, Stats Canada revealed canola stocks as of March 31, at just 6.6 mmt, compared to 10.6 mmt a year ago.

So, there are plenty of reasons for this rally to continue, and it may. However, it's a futures market, and much of the bullishness may have already been priced in. Canola, like corn, has overbought RSI and stochastic readings, which often tell us that a correction is likely, but never tells you when such a correction might occur. When it does, it could be vicious, but as in the corn market, little has changed as to why we got to such lofty levels, and there may be plenty of buyers waiting in the wings.

Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grain and soybean futures involve substantial risk and are not suitable for everyone.

Dana Mantini can be reached at dana.mantini@dtn.com

Follow Dana on Twitter @mantini_r

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