You generally can’t go wrong following the trend in a clear bull market. For almost three months this has been the rule for corn. Trending markets generally cycle from undervalued, to valued, and then to overvalued. By the end of September, it appeared the trend was complete. New market information in October gave the dominant trend new life.
For much of the uptrend this summer, traders had been using the 50% retracement area from the 2008 price decline as a target. Shown on the chart that is $5.27½. Prices hit that mark in September, fell back, and then clearly broke through in October.
Another factor to note about this breakout is a large 26.25¢ gap has been left (see "Breakaway gap," below). Instead of being defined as a "common gap," which has a good chance of being filled, this marks a breakaway gap. Technical analyst Ken Shaleen has always argued for the importance of monitoring volume. A high volume breakout lessens the chance the market will go down to fill the gap. In addition, we must keep in mind it was a high volume breakout past a key chart point. On the day this gap higher move was made, the CME Group posted record volume in corn. That leads me to believe this gap is a breakaway gap, representing new market movement, and that it is unlikely to be filled.
James Dalton, author of "Mind Over Markets," recommends that traders ask themselves, "What was the market trying to do and was it successful?"
The market attempted to move higher and was very successful. I am inclined to be a buyer either just into the gap at $5.52 or on a move past the last retracement level of $5.83½. Sometimes keeping it simple is the best way.
Rich Nelson is director of research for Allendale, Inc. You can reach him at email@example.com.