Peter Brandt | Apr 02, 2013 12:35PM ET
In two days, corn prices dropped 85 cents, or 11.6% of its value. Is that drop the end of the end, the beginning of the end or the middle of the end?
I have traded corn since 1975 -- initially at the Chicago Board of Trade for a division of Continental Grain Company and then as a private speculator. I trade markets primarily based on classical chart patterns, volume and open interest, plus an appraisal of the market's conventional wisdom.
Mid Correction
Based on my experience trading corn, I believe the huge price decline of the past two days represents the middle of a major correction in corn prices -- that this decline should bring prices to $5.10 per bushel (nearby contract) from Monday’s close of $6.43.
Of course, farmers reading this post will object to my prediction and claim that such a price decline is against the laws of nature and common sense. Yet ever since I started trading corn I have observed that farmers represent a population group that gets very rich from land prices, while continually complaining about crop prices.
Part Of A Larger Move
A massive price thrust, such as we experienced on March 30 and April 1, almost always occurs at the beginning, middle or end of a much larger move. Of course, farmers will claim that this price decline is the end of a larger price decline from the August 10, 2012 high. I believe that the thrust will end up being the middle point of a price decline from last Fall.
The quarterly chart shows that Corn is still historically expensive. Remember, the free market is not obliged to provide farmers with a perpetual bull market. A likely stopping point for this decline would be $5.10, the 1996 high and the 2012 low.
Bear Trend
I vote for the measuring gap. An exhaustion gap most often occurs at the end of an existing run-away trend. Corn prices have drifted sideways for the last three months. A measuring gap, in contrast, often occurs at precisely this stage of a bear trend.
Measuring gaps most often mark the “half-way” point of a bear trend. If the April 1 gap is of the measuring variety, the “measured” target is $5.10, incidentally a point of importance on the weekly and quarterly graphs.
Relative To Soybean And Wheat
There is one other factor that would support the hypothesis of the measuring gap -- and that is the price relationship of corn to soybeans and wheat. The ratio of Corn prices to the prices of Soybeans and Wheat dictate the planting decisions of farmers and the consumption decisions of users (livestock feeders). As the charts below show, corn is coming off a period of extreme over evaluation in relationship to wheat and soybeans. It is difficult for me to believe that this extreme over evaluation is ending with an exhuastion gap in the price of corn. In fact, the ratio charts would bettter argue for the April 1 gap to be a breakaway gap.
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