Tuesday Evening 21 February 2012
[Again, for the benefit of Seeking Alpha readers, while this analysis
pertains to corn, the sames steps would be employed in any stock.
The emphasis is on understanding markets from a market activity POV.]
When viewing markets, we like to "discover" something that catches attention that may lead to a trade. Lately, it seems that grains cannot get out of their own way, and corn took another spill. One aspect about corn is we see it as still in a bull trend on the longer time frames, but not so much on the daily, where corn has been in a sideways trading range. That prompted a closer look at today's activity, which was the Tuesday day session.
One thing you can know about any market is that when it moves sideways, it is setting up for a trade potential because eventually, price will break out of the trading range to establish, or renew, a trend. The farther price moves along the Right Hand Side, [RHS], of
a trading range, the closer it is to a resolve, and it is for that reason, we pause to take a closer look.
Normally, we start with the higher time frames, but we are already predisposed to corn having a bullish undercurrent during the past few months of downside correcting. What we have been waiting for is a
sign of stopping action, because that is when a trend turns, in this case, from down to sideways.
You can see where we singled out the strong move down, with a week close from 12 January. That one day erased almost 14 days of upward effort, and sellers made a clear statement that they took over
control. Yet only three trading days later, price rallied, and that rally led to the current trading range which started in late January, extending to present day.
In the middle of that consolidation, there is the highest volume, a red bar, indicating it was a down day. Typically, wide range bars down, on high volume and a poor close lead to farther downside levels. Yet,
price never really followed through to the downside. For all of the effort expended by sellers, there was very little payback, and that raises a red flag. There is nothing more to act on, but just the awareness of that observation.
What we saw today was a wide range bar lower, second bar from the end, [we forgot to erase the evening session, as we write]. You can see that it was wider than the previous down bar, three bars prior, but the close was above that prior down day close. What makes that more interesting it the failed probe lower, two bars before Tuesday's activity. Price went under the trading range, but also rallied back to close near the high of the day.
The failed probe gives you additionally information because it tells you there were very few sell stops under that price level, and there were no new sellers willing to press the market down even more, especially when it was so opportune. A lack of sellers often leads to buyers stepping in to fill the void.
Our conclusion was that if price can hold above the failed probe on Wednesday's trade session, or go just a little lower and then rally strongly back to the upside, buyers would be making a definitive
statement, and we should be paying attention for an opportunity to enter a trade at what could be a "danger point," with a reduced risk. It was then we decided to look more closely at the higher time frame
charts, as well. Why? We want to see synergy, a "story" developing. To the monthly...
You can see two wide range bars to the downside, each with poor a poor close. The closes at the low of the range tells us sellers were clearly in control. But look at what happens after the September sell-
off. October makes a lower low, but it closes strongly, [5th bar from the end]. Then in December, price barely makes a lower low, [another failed probe, but because it is on a monthly chart, it carries more
significance], and again, another strong close. Corn has gone from a downtrend to a sideways trend.
Whenever you see overlapping bars, it is important because it shows buyers and sellers in balance for a power struggle. Buyers have stopped sellers from taking price lower. While January had a lower
close as compared to December, thereby making the volume bar red, note the position of the close. It is at the upper end of the range, edge to the buyers when sellers are supposedly in control. What does
the weekly chart show?
There are a lot of lines on the weekly chart, but an important one is the horizontal line in the middle. It is marked, "50% retracement, low to high." There is a line overlayed from the June 2010 low to the June
2011 high, and a half-way retracement comes in around 563. When a market can hold above the half-way retracement level, it is a sign of strength. We did not draw it on the monthly, but both time frames are
holding above a 50% correction.
The next lines are the ones off the June 2011 and August 2011 highs, extended lower. That forms the upper channel supply line. From the June 2011 low, we draw a line parallel to the supply channel line, and
you can see it held the October low. That low was 572.
Another recent low in corn's down move occurred in December 2011, at 570. Here again, we see a probe lower that fails to trigger any stops or new selling to carry price lower. Notice how small the range is at the December low. It provides you with an important piece of information because it tells you that buyers were taking whatever sellers had to offer, and that kept the range from extending lower. Sellers have lost control.
We see added confirmation by two other observations. 1. The barely lower low is stopping the decline, and 2. price failed to reach the bottom channel line and has moved more to the middle, and is now even getting closer to the upper supply channel line. [The three arrows point the lessening of downside progress more clearly.]
The final observation is the encircled clustering of bars and closes. It denotes the struggle previously mentioned in the balance between buyers and sellers, and where sellers have lost downside momentum,
edge goes to the buyers. The onus is on the buyers to demonstrate an ability to change the trend, and they appear to be doing just that.
We come back full circle to the daily chart, which started this whole analysis. You can see a story on all three time frames, and when it happens concurrently, it is something to be heeded. An indication of
strength on Wednesday will prompt a long position for the reasons provided in our little story. [If there is no sign of strength, there is no reason to get long, at this point.]
Not the end...