Drozd: Corn and soybean prices rally to a record high

For the first time in history, corn reached $8 per bushel on the nearby futures chart and soybean prices posted a new historical high of $17.77 3/4 per bushel on July 20. This exceeded the previous high of $16.63 in July 2008.

There are countless headlines depicting the “Drought of 2012” as the worst the United States has seen since 1988, or possibly even 1956.

This news has undoubtedly fired up speculators, whose buying frenzy has driven corn, soybean and soybean meal prices to a record high. You know a market has garnered a lot attention when the open interest is higher than ever before. In fact, the open interest in soybeans at the CBOT (Chicago Board of Trade) recently reached a record 838,137 contracts, which is 4.19 billion bushels. This is a billion bushels more than U.S. farmers will produce this year.

There’s an adage: “Bull markets die under their own weight.”

This occurs when the speculators decide to liquidate their long positions and this is in part what causes prices to turn back down — regardless of how tight the stocks are perceived to be. So it’s not a matter of “if” prices will turn back down, but “when.”

I find charting and technical analysis proves to be especially valuable in bull markets like this because chart patterns often provide expectations on how high prices will go. I’ve attached the monthly nearby corn futures chart at the CBOT to illustrate this point.

In January 2008, corn gapped higher on the monthly nearby futures chart. This was a mid-point measuring gap and the measurement derived from this formation indicated corn would rally to $7.30 a bushel. At the time corn was $4.58 per bushel and the historical high price which occurred in July 1996 was $5.54 1/2, so $7.30 seemed like quite a feat. Yet, farmers who resolved to put their faith in this chart formation were able to sell the majority their 2007 corn crop above $7.30 per bushel.

Chart formations that occur on a longer-term chart, such as a monthly chart, have more prominence than similar patterns on a daily or minute chart. This is especially true for gaps because there are only 12 opportunities per calendar year for a gap to occur on a monthly chart, as it can only occur on the first trading day of a calendar month.

More recently, corn prices gapped above an important area of resistance on the monthly chart. This area of resistance is the intersection of the two lines I’ve drawn on the attached chart.

This gap, which developed on July 2, between $6.76 1/4 and $6.79 3/4, was also a mid-point measuring gap and it gave an objective of $8.05, which was achieved on July 19.

Mid-point measuring gap

Gaps are areas on a chart where no trading has occurred. An upside gap is the result of a higher opening.

In a bull market, the mid-point measuring gap appears after a move has begun to accelerate. It is a sure sign of the heightened anxiety and excitement of traders who, depending upon their position are waiting for an entry or exit opportunity, see the market getting away from them and quite simply respond by buying.

This type of gap must appear during a fast advance after prices have cleared away from a congestion area. This gap is used to measure the extent of the move, as it appears at approximately the halfway point. If two or more mid-point measuring gaps materialize, the midpoint of the move will lie between the gaps.

Gaps are an invaluable tool for farmers. Those who recognized the gap on July 2 could target the record-high price of $8.05 to make their first incremental sale of corn, feed barley and feed wheat for the 2012-13 crop year.

Send us your questions or comments about this article and chart.

— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about grain marketing advisory services, or call us toll-free at 1-888-274-3138 for a free consultation.


Stories from our other publications