Drozd: Corn market plummets after rallying to a one-year high

Faced with the realization that a weather market can end as quickly as it began, 
farmers have the daunting task of figuring out when to sell

It took the corn market three weeks to rally 75 cents per bushel and only two weeks to plummet just as far. When markets go down faster than they go up, farmers may have a difficult time taking advantage of a steep market rally like this.

Farmers get busy and may not have got around to checking the markets. After all, the news was bullish, grain prices were rising and the crop was not in the bin, so marketing may not have been foremost on their minds.

However, the market does not wait for anyone. An opportunity to sell can come and go at the blink of an eye, so having a disciplined marketing plan is essential. I realize it may not be easy selling something you don’t have, but this is when opportunities arise. The fact crop conditions were deteriorating was the reason for the weather rally.

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Once the weather outlook turned more favourable and crop conditions began to improve, the speculative longs in the market began liquidating their positions. At first they sell to take profit and preserve capital, and as the market falls further they sell to limit their losses. In this environment the market nosedives regardless of the news.

So faced with the realization that a weather market can end as quickly as it began, farmers have the daunting task of figuring out when to sell their grain. Farmers faced with less-than-average production will have a much higher break-even price per bushel, so innately they are reluctant to sell if the market price is below their cost of production. However, the market doesn’t always provide them with the price they need to be profitable.

In this situation emotions run high and it becomes difficult to make a sound marketing decision. However, by taking a disciplined approach, which involves setting realistic price objectives, farmers can make the most of a difficult situation.

Fibonacci retracement, used in charting and technical analysis, is an invaluable tool for setting reasonable price objectives.

Fibonacci retracement

Fibonacci retracement is a method of technical analysis for determining support and resistance levels. It is based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction.

After a decline, fibonacci ratios define retracement levels, which forecast the extent of a counter-trend bounce. To calculate the fibonacci retracement levels, start by finding a significant high to a significant low, which I’ve illustrated as point A and B in the accompanying chart. From there, prices often retrace the distance by a ratio of 23.6 per cent, 38.2 per cent, 50.0 per cent, 61.8 per cent, or the 76.4 per cent retracement. I tend to focus on the 38.2 per cent, 50.0 per cent, and the 61.8 per cent retracement.

In a declining market, the 61.8 per cent retracement is often the most a market will rebound before resuming the downtrend. This area of resistance can be a good place to make a sale.

I’ve observed over the years these retracement levels often correspond with previous areas of support and resistance. The 38.2 per cent retracement level ($4.18), coincides with a previous area of resistance at point C.

The 50 per cent retracement level ($4.34), corresponds with a rally high (D). The 61.8 per cent retracement level ($4.51), was once an area of support (E). It is important to note that old levels of support, once breached, tend to become resistance on future rallies. This is exemplified with the recent rally in corn.

Farmers who identified the 61.8 per cent fibonacci retracement level as an area of resistance, took advantage of the opportunity to sell corn before the market turned down.

Send your questions or comments about this article and chart to [email protected].

About the author

Columnist

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. Visit Ag-Chieve online at www.ag-chieve.ca for information about our grain-marketing advisory service and to see our latest grain market analysis.

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