- At the end of last week, the odds were not good for Dec24 corn to complete a long-term bullish technical reversal on its continuous monthly chart.
- However, when it comes to markets, nothing is ever impossible. Improbable maybe, but not impossible.
- At Tuesday's close, Dec24 corn was back within 7.0 cents of completing that bullish reversal, with three trading days remaining in the month.
Over the centuries, there have been a number of great market analysts. I often quote the greatest of them all, Sir Isaac Newton, by applying his First Law of Motion to markets: A trending market will stay in that trend until acted upon by an outside force. More recently, we could add author Malcolm Gladwell to the list given at least two of his books, “The Tipping Point” (I talked about this in a piece from June 2022 after the corn market moved into a long-term downtrend) and “Blink” (I mentioned this in a recent piece from June 2024). There are many others that quickly come to mind for those in the industry, but I want to talk about one that isn’t mentioned all that often, if ever.
Lloyd Christmas.
That’s right, Jim Carrey’s character from the 1994 movie “Dumb and Dumber”. I can hear the murmurings out there, that this time I’ve completely lost my mind, but hear me out. What is the one line from Lloyd that gets quoted more than any other? (I’m guessing you’ve already said it to yourself by now.) “So you’re telling me there’s a chance! Yeah!!”
What brought this to mind as we approach the end of August 2024? It is related to the previously mentioned long-term downtrend in the corn market. For this discussion, I’m going to focus on the December 2024 futures contract (ZCZ24) (with the piece from June 2020 talking about the national cash index). A look at the Dec corn continuous monthly chart shows Dec22 completed a bearish spike reversal[i] at the end of May 2022. Now, 27 months later the Dec24 contract could complete a bullish spike reversal if it can find a way to close above its July settlement of $3.9975. The contract closed Tuesday, August 27 (2024) at $3.9275. While that is still 7.0 cents away, given what we watched happen the first two sessions of this week increase the odds of Dec24 turning bullish on a month-end buzzer beater.
Let’s backtrack a bit though. When the market closed Friday, August 23, Dec 24 corn was priced at $3.91 after posting a low of $3.90 the week before. For a while it seemed the contract was going to be a picture-perfect example of corn’s characteristic Round Number Reliance that tells us how different aspects of the market like to go from round number to round number in search of support and/or resistance. When the market opened Sunday evening (August 25), Dec24 held the $3.90 level for a while, a short while as it turned out, before plunging to a low of $3.85 on Monday, August 26 and closing at $3.8650. I said at the time this was going to make a technical bullish reversal on the December continuous monthly chart more difficult, not only because of the distance it needed to cover (13.5 cents) but because of the low implied volatility[ii] of the futures contract itself. At Monday’s close Dec24 corn was showing implied volatility of 18.4%, at the low end of the range on its daily chart.
What was unusual about Monday’s close, particularly with volatility decreasing, is that trade volume was increasing rapidly late in the summer season. The previous Friday saw 190,430 contracts of Dec24 corn traded. However, when Monday’s closing bell rang a reported 251,700 contracts had changed hands, the third largest trading day of the summer season (June through August). Tuesday’s preliminary volume number from the CME was sitting at roughly 273,000 contracts.
Where was the buying coming from? The latest CFTC Commitments of Traders report showed noncommercial interests (funds, investors, algorithms, etc.) were holding a net-short futures position of 165,300 contracts as of Tuesday, August 20. The net-short futures position was an increase of 11,290 contracts from the previous week, but how it got there was interesting. The noncommercial side decreased their long futures holdings by 9, 150 contracts while increase their short futures position by only 2,140 contracts. The fact more of the change was created by long liquidation was less bearish than if it had been driven by new short orders. From Tuesday, August 20 to Tuesday, August 27, Dec24 closed 5.25 cents lower for the week, implying funds had continued to add to their net-short futures position. But again, this weekly change was cut in half by the last-minute rally.
What about the commercial side? At the previous Friday’s close, corn’s futures spreads covered a larger percent of calculated full commercial carry[iii] than the previous weekly close. While futures spreads were still neutral (between 67% cfcc and 33% cfcc), the weekly change did indicate the commercial side was putting pressure on the market heading toward the last week of August.
If those are the only two sides of the market, who was buying Tuesday? My Blink[iv] reaction would be the noncommercial side, even though we saw the carry in futures spreads weaken slightly. Why? Because Tuesday is the last day of the positioning week for noncommercial traders given data for the next round of CFTC CoT reports is pulled after the close.
All of this combined should make for a fun last three days of the week, month, quarter, marketing year, and season (meteorological summer) in the corn market. If funds return to putting pressure on the market once Wednesday rolls around, some of the steam could be taken out of corn. On the other hand, if noncommercial traders continue to buy on big trade volume, well…
As Lloyd said, “So you’re telling me there’s a chance.”
[i] Posted a new high of $7.6625 before closing at $7.1150, down 39.75 cents for the month.
[ii] There are a number of definitions for volatility. I prefer the simplest one, “How far and fast a market can move over a set period of time”. The higher the volatility, the farther and faster a market can move. Recall volatility is one of the filters included in Newsom’s Rule #3: Use filters to manage risk.
[iii] Total cost, storage and interest, to hold grain in commercial storage.
[iv] Referring to Malcolm Gladwell’s book, “Blink”.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
