Market Monitor

By Marlin Clark

Hunting the tops at harvest

Grain markets on the Chicago Board of Trade continue to hunt chart tops, even as combines roll. This defines the concept of "contra-seasonal," as we normally are weak at harvest.

Grain prices continued to press higher after the October 8^th USDA Crop Production Report. As discussed last week, that surprised the market with lower corn and soybean crops than expected. In the case of corn, the crop was cut four percent and is no longer expected to break last year's record.

Normally I expect a crop report to be a "one-day wonder." That is, we adjust prices based on the new expectations and go on. Sometimes we go higher with lower production. Sometimes we go lower with higher production numbers. Sometimes we go the opposite of the expected move because the change is there, but not as big as expected. Still, we correct in one day, then the trading moves on.

An exception comes when the surprise is large. In this case, markets were limit up Friday the 8^th, so all the pressure was not relieved. Since the report came on a Friday, the limit moves could have been considered an overreaction by traders not wanting to be exposed over the weekend. Fortunately, Columbus Day was not a trading holiday, which would have made the situation worse.

It would not have been a surprise to come back in Monday and actually trade lower. I expected to trade lower by the end of the day. I was wr..wr..wrong. Markets had follow through that is only now working its way out of the market, a week later.

Here on Tuesday morning before the day session has started, we are sharply lower on corn, soybeans, and wheat from the overnight session. December corn futures are off more than a nickel, beans are down 14 cents, and the wheat is off eight and a quarter cents. This is a nasty change in prices, and gets all three commodities to the bottom of the range traded since the report.

Corn and beans left large gaps in the chart by the spurt higher Friday. This gets the technicians a chance to get excited. We have now traded seven days above the gaps, counting the overnight Monday/Tuesday. If we should gap lower, we would have created a very dramatic formation—the island top. This is represented on the chart by several lines above the chart that look like an island, not connected to the rest of the chart. I would be extremely negative. It is also unlikely, given that the overnight did not start the gap, but has traded down into the gap, as did the trade yesterday.

Next in negativity would just be lower trading that would fill the gap. That is, a return to the levels we had before the Friday reports. That would mean we had absorbed the report and the excitement was over.

It remains to be seen where we are going, but the chart formation demands it be defined soon. If we turn higher without filling the gap, we have defined a bullish move instead of a bearish one. And, we have defined it at a "contra-seasonal" time.

Looking at prices, December corn gapped from 5.28-1/4 to 5.55 Friday, then traded as high as 5.88 on last Wednesday, the 13^th. We are now at 5.52, back into the gap. Soybeans gapped from 11.35 to 11.50-3/4 Friday. We hit the high of 12.04-1/4, a very high significant number. Twelve dollar beans! Now we are at 11.70, which is well above the gap. The case can be made that this is now a bean rally, and beans have not turned negative, since they are still trading above the gap.

The wheat was up 60 cents Friday to 7.39-3/4, but that seems to be just in sympathy to the other grains, and a mere blip on the slow stairstep progression to lower prices. We are now 6.81-3/4.

Marlin Clark trades producer and elevator grain for Keystone Commodities from an office near Andover, Ohio. He welcomes your comments at 866-293-4433.