From the November 01, 2011 issue of Futures Magazine • Subscribe!

Tech Talk: Corn sees trouble ahead

Exactly one year ago, in the segment titled "Back to basics," we discussed how the corn market was preparing for the next move higher and would use a gap on the charts at the time as a place for buy orders. The market ultimately continued higher until a peak was finally posted this summer. The peak also marks an important turning point as it was indicated by the well known head and shoulders formation (see "Head over heals"). That formation finally was confirmed in September with a break below the "neckline" shown on the chart as a dotted line.

From that breakout point in the neckline, another $1.86 ¼ decline could be seen until the measuring objective of $4.37 is filled. As is the case with many head and shoulders formations, it is not uncommon to see a moderate pullback just above this breakout point. Place sell orders at the first Fibonacci retracement level drawn from the move off the right shoulder high. This retracement, 38.2%, would put a short-term rebound at $6.46.

Another interesting comparison on this chart can be made with the rally into 2008 and subsequent decline. From the low on July 23, 2007, corn rallied for 340 days and advanced 148%. This year’s rally was kicked off from the clearly defined June 26, 2010 low. The total move was 349 days from that point for a gain of 146%. Is that coincidence? As long as we are talking about the rally, let’s point out the decline. Off the 2008 high, prices made a maddening 161-day dash down and lost 62% of their value. A similar move, set off the 2011 high, would imply a Nov. 18, 2011 low at $3.03. That may be a bit aggressive this time around, but keep it in mind!

Rich Nelson is director of research at Allendale, Inc. (www.allendale-inc.com). You can reach him at rnelson@allendale-inc.com.

About the Author
Rich Nelson

Rich Nelson is Director of Research at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA. www.allendale-inc.com.

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