Technically Speaking

The Memorial Day holiday weekend has passed meaning summer has unofficially started. For those involved in the grain trade, that means the door has been opened to weather markets. This year is a bit unusual as instead of a normal hot, dry period sparking a rally the corn market seems to be reacting to heavy rains and flooding over most of the US Midwest, particularly Iowa, to start the new week.

A close look at the December corn contract's weekly chart shows a number of interesting developments. Monday's overnight session saw the contract leave a price gap between last week's high of $5.37 1/2 and the overnight low of $5.41 1/2. A price gap is an area where no trade occurs and by definition this move could be viewed as a bullish breakaway gap. A "breakaway gap" usually occurs at the end of a previous trend, signaling the beginning of a significant move in the direction of the gap. In this case, with the gap being above last week's high, that direction would be up.

Confirming the move to a possible uptrend are weekly stochastics (third study, combined red and blue line). Notice how recent weeks have seen the two lines continue to crisscross near the oversold level of 20% as Dec corn trended sideways. However, last week's late rally led to a settlement in stochastics of 26.9% by the faster moving blue line and 23.2% by the slower moving red line. This indicated that momentum was trying to turn bullish once again meaning the trend should turn up.

Recall that the trend in the futures market is largely a reflection of the flow of money into or out of a market. If investment traders are turning more bullish and buying into a market, the trend tends to be up. On the other hand, if this same group is turning bearish and selling, the trend tends to be down. Looking at the noncommercial long futures position from weekly CFTC reports (fifth study, thick blue lines), you see that this position has been growing larger the last few weeks. Also note that total open interest in the Dec corn contract (bottom study, orange lines) has also been increasing.

All this adds up to a bullish technical argument for corn. Yet, don't look for the market to run over sellers unless a couple of things change. First, market volatility (fourth study, thick red line) is relatively high at almost 21%. Remember that investment traders don't like high volatility as it increases risk, meaning they may ride the wave for a short while before pulling out again and look for a less volatile opportunity (e.g. November soybeans).

Second the commercial view of the market remains neutral, as indicated by the sideways trend at a solid carry in the December to March futures spread (second study, green line). Extending this argument further, the March to May and May to July spreads (not shown) are also showing a solid carry reflecting a long-term neutral commercial outlook.

Given all this, the budding uptrend in the futures and sideways trend in the spreads, the December contract could be expected to see a 50% retracement of its previous downtrend from $6.65 (high the week of September 2, 2012) through the low of $5.12 (last week's low). If the futures spreads turn more bearish, the contract could struggle near the 33% retracement level of $5.63. A turn up in the spreads (weakening carry) would hint at a 67% retracement to near $6.14.

To track my thoughts on the markets throughout the day, follow me on Twitter: www.twitter.com\DarinNewsom