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Clues of a top

Reading chart patterns worked last summer. Here are more signals to watch.

Faced with another year of squeezed profit margins, growers jumped at the chance to book new crop soybeans sales over the winter. Our March survey of more than 1,200 growers showed the average producer locked in protection on a third of 2017 production using cash contracts, futures or options. The most profitable farms went even further, pricing nearly half their expected yields.

Opportunities for corn sales weren’t as attractive. On average growers said they’d sold only 20% of 2017 corn. But farmers as usual are optimistic. Three quarters said they expect to have opportunities to sell more 2017 crops at a profit during the growing season.

There’s good reason for these hopes. Most years do indeed bring rallies when weather threatens yields, even if the scares eventually turn out to be false alarms. Right only cue, the markets are again rallying on weather concerns this June.

But actually pulling the trigger when prices surge can be difficult. Having a plan helps, especially if that roadmap includes some specific signals to follow in advance for making decisions.

A year ago we reported results of a study evaluating how basic technical indicators performed over the previous 30 years. None was a silver bullet, but some of the indicators did indeed appear to produce prices better than just hauling corn to town off the combine at harvest.

The summer of 2016 was a case in point. The average December futures price generated by hypothetical sales using these eight methods was $4.187, in the top 25% of the price range for the summer.

These indicators are pretty basic stuff in the world of market analysis. They included overbought Relative Strength Index, divergence between futures and the RSI, trendlines, gaps, reversals, moving averages and increases in weekly crop ratings put out by USDA.

Our story from a year ago - Six tips for selling rallies - Price charts offer clues, but not silver bullet.

And a recap of how the tools did in 2016 - Anatomy of a rally - Weather market in corn followed a familiar script.

Three more metrics followed by traders may also be useful in spotting selling opportunities.

Volume and open interest provide two key pieces of information about the market: How many contracts are being traded, and whether buyers and sellers are opening new positions, or closing exiting ones. Both can be viewed for individual contracts and for the total of a commodity like corn.

Heavy volume, of course, means a lot’s going on. Futures making a move on heavy volume suggests something big has happened, such as a USDA report surprise or a changing weather forecast. When futures move on low volume, it can mean the price change was caused by thin trading that can be a suspect indicator.

Rising open interest means new money is coming into the market, reinforcing the futures price move. Falling open interest, by contrast, suggests traders are covering short positions or taking profits on longs. Short covering rallies can be over quickly, while profit taking may not hold back a rally for long.

Volume and open interest can help show whether a move is real. A reversal lower on strong volume and open interest has a better chance of being a true bearish turn according to our research.

Implied volatility measures how options premiums reflect market uncertainty. Writers of options agree to take futures positions if underlying contracts move enough, risking unlimited losses. So the premiums they demand for selling puts and calls increases when they fear being caught in big swings. Implied volatility tends to increase into a rally and as it makes a turn lower. Spikes that break lower can be a warning sign that they party is over.

Follow the funds. Big speculators aren’t always right, but it usually doesn’t pay to bet against these so-called hedge funds. More than half the variance in corn futures depends on what funds are doing on any given day. When funds start selling after buying into a rally, it’s normally a good time for growers to make a gut check too.

You can follow these three indicators, and the others, by signing up for our free Farm Futures Daily newsletters. Go to www.FarmFutures.com and hit the “Register” button in the upper right hand corner of the home page.

TAGS: Management
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