Monday Evening 14 November 2011
[Again, as a prelude for those who are only stock-oriented, the
chart on beans can also be the chart for any stock. It is the
concepts presented in the charts that are important, and not
the underlying subject.]
The unexpected, non-stop decline in the grain markets, starting
with the September highs, is one of the reasons we stopped
trading the markets, temporarily. Typically, when a market tops
out, it does so in a recognizable fashion, of sorts, usually in some
kind of buying climax, followed by a retest, and then the decline.
Comment about that will be made on the daily chart, but first, the
We always recommend having a context from which to gauge
where a market may be headed, and that starts with the higher
time frames, as opposed to most traders who rarely venture
beyond a daily chart, and often look at intra day charts for clues.
Prior to the September sell-off, the sideways activity of 2011 had
the appearance of accumulation, at least to us. The strongest bars
were to the upside with equally strong closes. August, 4th bar from
the end, gave the appearance of an upside breakout, but one never
happened. Instead, the month of September wiped out the entire
year's activity. All of the options players got wiped out, in the
process. Maybe that was the intent and the best explanation for
what happened. We do not know.
From a factual stand point, we see higher highs and higher lows
since the 2008 low, and even after the September decline, price
continues to hold a 50% range correction. That observation is just
a guide, but it does indicate relative strength or weakness,
depending upon the market's ability to hold above 50%, and right
now, it is doing so.
The 2011 trading range is captured between the heavy horizontal
lines. At the end of August, price rallied off the lows of just under
1300, once again, and went to the high end of the range. The
last week's high for that month was a smaller bar and a mid-range
close, suggesting some stopping action at the previous February
high, but that was not unusual. What was unusual was the extent
of the decline that followed.
Price stopped in October,and note that the range at the low was
also small, another sign of stopping action, but there were a few
other considerations of note. The last three bars down, going into
the low, were on persistently high volume. Compare the previous
two ranges of the bars that led to the low. They are substantially
larger than the low at 1150. the only deduction to be made is that
we were seeing climactic selling, and the small range low bar
resulted from buyers entering the market and preventing the range
from extending lower. Also, that stopping action was near the 50%
retracement level, but more importantly, it held the gap from the
same time period in 2010. [We intentionally left pointing that out
on the chart to see if you could discern it on your own.]
We have talked about spacing in the past. It occurs when the
most recent swing low stops above the last swing high, and that
high has the bottom horizontal line drawn from the top. There was
a strong breakout in September/October 2010 that led to the 2011
highs. The resulting spacing is another sign of relative strength
that says buyers are entering the market at the 1150 area without
waiting for the obvious retest of that 1075 area of support.
The highest volume shows how demand stepped in when price
rallied, 6th bar from the end, instead of any downside follow-through,
yet another sign of strength. That one week rally on the highest
volume is now in the 5th week of correction. That, too, tells us
sellers are no longer as dominant in trying to push price lower.
Both the monthly and weekly charts provide the context from which
to view the daily chart, which follows.
At the top of the daily chart, we mention the stopping action of the
small bar high at the end of August. In real time, we were long the
breakout, three days earlier, and were prepared to add to the
position on a retest of the breakout. Markets are always testing
and retesting previous support/resistance areas, so a retest to
14 would be normal market behavior. We liquidated positions
in beans and corn with a small net profit, having left substantial
potential profits on the proverbial table.
Note the lack of sharp volume increases on the ensuing decline.
There were NO attempts at rally corrections, at all...just a
relentless move lower. This market activity made little technical
sense to us in an environment of government and central bank
meddling in the financial markets, all in the midst of efforts to
cover up the "too big to fail" mistakes, and propping up all the
insolvant banking institutions responsible for the mess to begin
with. It was the proverbial straw that broke the camel's back
moment for us, and so we withdrew from father market participation.
The risk/reward exposure favored mostly the risk.
Here we are, now, at the recent lows, assessing what is developing,
as the above two charts reflect. First, the obvious. As noted on the
weekly, the rally from the low took five trading days. The correction
of that rally has now taken 20 days, or four time as long, to retrace
most of the gain. We should add that the decline from the last day
of August high to recent low took 23 days and covered $3.23,
compared to the $1.12 retracement of the past 20 trading days.
Clearly, this is a change of market behavior, in terms of results.
Dissecting the internals of this 20 day retracement, the highest
volume occurred at the end of October. One has to ask, is that
selling or buying activity? The trend is down, so sellers have been
in control, but where are the lower prices resulting from their efforts?
Look at the two down days, again on high volume from the fourth
and fifth volume bars from the end. [Monday's volume barely shows
up,at the bottom]
We ask again, after two strong selling days, with closes at the low
of each bar, telling us sellers are winning the battle, where is the
follow-through? There is none. Here you see a perfect example
of why reading volume is an art and cannot be a mechanical
What we are saying is that the increased volume activity on this
labored correction has been covert buying by smart money. If we
are right in the interpretation, it is a deft execution of how smart
money functions in the market place, endeavoring to hide their
activity amidst the trees of the forest, as it were.
We may be looking at a danger point where being long beans is
better than being short.