Corn - Smart Money Putting On Short-Squeeze Clinic
While most eyes remain fixed on gold and silver, and the stock market, to a lesser extent, the Fed having driven the little investor away, we take a fresh look at the corn market. It has been some time since we last visited grains, and corn deserves some attention. What do traders in PMs, S&P, Natural Gas, Notes, or Corn have in common? To them, nothing. Being chart-driven, for us all charts are the same. An opportunity is what we look for, and it matters not from which sector that opportunity arises. Nor does not matter what the underlying product is in any chart. We are equal-seeking opportunists.
We reference this as a short-squeeze clinic because if it can happen in corn, it can happen in any market, [and does!]. This analysis also conveys why the best source for information comes from the market itself. Starting with the monthly:
This chart is bullish for several reasons. There are consistently higher swing highs and higher swing lows, the essence of a trending market. The higher the time, the more pertinent and reliable the information. Price rallied to the last swing high in just 3 months. Since that high, the correction lower has taken 5 months, or almost twice as long to retrace only half the gain, another characteristic of a trending market. Where price stopped is also important.
A horizontal line is drawn from the last large bar down, followed by an equally large up bar, the first of the three bar rally to highs. The solid portion of that axis line covers the then failed highs and the gap between rally bars 1 and 2 leading up to 3. The remaining portion of the horizontal line is dashed to show how it extends into the future, six months before price came back to retest that level. It is an axis line because it acts as resistance to the left and then becomes support to the right, and this same line shows up on three different time frames, attesting to its validity. The decline also stopped just under a 50% retracement. In futures, there are different contract changes that account for "wiggle room" in some price areas. In horseshoes, this would be a "leaner."
In all events, the market is sending an important message. When it shows up in all three time frames, then we have ourselves a trade potential, with an edge. Edges are good, in fact, preferred.
We have to chuckle over this chart. Prior to commenting on recent developing market activity since the last swing high, we drew channel lines to capture the down move from the June 2011 high to the May 2012 low. It led to the breakout shown for June/July 2012 on the chart. The observation was added at the bottom to show how the failure for price to reach the bottom of the support channel line was a clue that the breakout was likely to be more reliable. A similar channel was drawn for current activity for comment and we then saw the "deja vu" moment. Point? Patterns repeat all the time.
You see the same axis line and how price retraced right to it. The 50% area was at 797, again, close enough and a validation that December/January may have formed a low.
The daily time frame echoes the likelihood of a swing low for corn. The market messages are very clear throughout the varying time frames. The huge volume and price spike at 1 was a "What the hell just happened?" moment, at the time. It was a day of massive short- covering by smart money, and it also marked a change in the market's character. That day merits closer inspection.
You have to pay attention whenever there is a large spike in volume and/or price range, more especially when the spike occurs simultaneously. It is even more relevant when this takes place at important support. The fact that this happened at a low indicates a change of risk from weak hands into strong. Smart money takes important action at highs and lows. You can be sure that the public does not generate high volume. High volume is created for a reason...the change in risk, just mentioned. It marks the effort of controlling influences to get the public out of their positions. How can one be sure?
Controlling influences are not sellers at lows; they are buyers. The sharp increase in volume is them accumulating a market position. This reflects the exchange of risk, and it is a visibly classic example of a short squeeze. A thorough analysis of several intra day charts bears this out.
Back to the chart. 1.was just explained. At 2, it looks like price is absorbing seller's attempts to get price lower so shorts can cover at more reasonable prices and curtail their losses. We added the comment, "or not" because there was similar activity at the channel line at area 5, where price failed to go higher. Anything can happen.
You can see from 3. that there has been very little give-back in the form of a correction. Longs have shorts by the shorts, and they will make them pay up to get out, giving no opportunity to get out at lower levels. "You play, you pay."
The similarities of the channel line on the weekly chart show where the current swing low is way above the lower support channel, [not visible on the chart], and that is a measure of underlying strength gathering for a trend change. The 50% retracement is more exact on this chart because it measures the distance between swing high and low within the same contract month.
One has to like the potential for corn from the long side. So says the market. We are mere messengers.