The rally that began in the canola market with the delayed harvest is over. The chart pat-t erns were textbook perfect in predicting the inevitable, which was for prices to peak in early January and turn lower.
It all started with prices breaking down below the line of support (A) in December 2009. Support areas materialize as a market attracts buying at the line of support. A line of support is determined by drawing a line across the lows. For a trendline to be both valid and reliable there should be at least three points of price contact. Each point coincides with the low of a market reaction.
However, once prices break down below the line of support, then all recent buyers end up holding losing positions. Consequently, selling increases as longs liquidate and shorts who sold at higher levels add to their profitable positions.
Prices then posted a weak recovery (a dead cat bounce) into overhead resistance (B). This area of resistance (B) was especially significant because it occurred where not one, but two lines of resistance intersected.
A horizontal line of resistance formed when prices failed to move above $415.50. The former line of support (A) became a second line of resistance when prices bounced back from the original penetration. It is not uncommon for a line of support to turn into a line of resistance like this, and when it does, it provides farmers with an excellent selling opportunity.
From there, the market quickly developed a two-week reversal and gapped lower the following week making the ensuing outlook extremely bearish. Additional weakness experienced in the weeks that followed added confirmation of the topping action.
A two-week reversal indicates a change in trend. On the first day (at a high for the move), the market rallies and closes near the high of the week. Prices open unchanged to slightly higher the following week, but fail to make additional upside progress. The advance stalls and prices begin to turn down as selling increases early in the week. By the end of the week the market drops to around the preceding week’s low and closes at or near that level.
The two-week reversal signifies a turn in sentiment. In the first week the longs are comfortable and confident. The market’s performance provides encouragement and reinforces the expectation of greater profits.
The second week’s activity is psychologically damaging. It is a complete turnaround from the preceding week and serves to shake the confidence of those who are long the market. The immediate outlook for prices is abruptly put in question. Longs respond to declining prices by selling in order to exit the market. Some longs sell to take profit and others sell to limit losses.
When a breakaway gap (C) develops at the completion point of an important reversal formation like this, it adds confirmation of pattern validity. Prices seldom recover when pattern completion is accompanied by a downside breakaway gap.
Sell orders materialize just above the market when a new downtrend begins to emerge. This selling keeps a lid on prices and when they stop going up other sellers jump in for fear of missing the move and this causes prices to move lower.
Some profit-taking emerges when prices drop down to new lows. This results in an increase of potential sellers getting back in when prices move back up. Their sel ling weighs on the market as well as that of longs eager to take profits during periods of upward price corrections.
I don’t expect to see a significant recovery until after the long liquidation is over.
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David Drozd is President and senior market analyst for Winnipeg based Ag-Chieve Corporation. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis in the markets influencing agriculture. The information contained herein is deemed to be from sources that are reliable, but its accuracy cannot be guaranteed. Visit us online at www.Ag-Chieve.ca/cooperator/formore grain marketing ideas and educational tools, or call us toll free at 1-888-274-3138 for a free consultation.