The Futures / Inter Market Report

Trading the World’s Markets                            

February 29, 2008

                                            
Matthew Caruso, CMT                                  
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Grain markets approaching the end of their trends

            Of all the commodity bull markets the grains have one of the most spectacular of late.  With the advent of ETFs stock investors can now participate in the grain bull market through the new agriculture ETF (probably a sign of a top in itself). Unfortunately, it appears that the great grain bull market is approaching an end. This is not to say that the top has occurred, I don’t try to pick tops, and that is not what technical analysis is meant for at least in my opinion.  However, the charts and investor psychology can help us to know when a trend is reaching an extreme. That is what I believe we chartist can now ascertain for the charts of the grain sector. 

            One of the strongest of all the grain markets has been soybeans. As you can see in figure 1, this market has been on a parabolic rise of late and appears to be near the end of a run up that started in late 06’. Although a rise of this magnitude would make any investor long this market giddy with joy, the indicators in figure 1 are an unhappy reminder that every bull market has to end, or at least consolidate itself. I want to draw your attention to the LW sentiment and genesis sentiment, both which are at a high extreme. The 99% LW sentiment reading means that approximately 99 % of all advisors are bullish on this market now. That type of psychology is typical of tops. As well, Commercial traders are as bearish as they have been in years. Smart money is obviously unwilling to buy this market at these levels. However, as you can see, bearish commercials are not enough to signal a top in a market.  Technical tools are always required to confirm and time the tops of the markets.

Figure 1 chart by genesisft.com           

            If you study the second chart in figure 2 you will see two key points to consider. Firstly, this market has now gapped higher for 2 weeks in a row and never retraced to close the gaps. As well, this past week had the largest true range of all the weeks in the recent up move. The gaps are very likely exhaustion gaps. This is a classic sign that a trend is exhausting itself. As well, the large range expansion is displaying the almost insatiable appetite of investors to pour into this market.  This type of frenzied buying is typical of any market that has entered into speculative buying. This is visible in every grain market including oats (figure 3), corn (figure 4), and especially wheat (figure 5) which had a major key reversal last week. 

            All this is not to say that Friday was the high of the grain bull market. Before the rise ends we need to see a reversal in momentum (as in wheat). When that occurs expect a very fast, large and unforgiving move to the downside. Due to the new ETF (most likely developed to drag yet more money to this market) stock investors will not be safe from the reversal either.

Figure 2  chart by genesisft.com

Figure 3  chart by genesisft.com

Figure 4  chart by genesisft.com

Figure 5  chart by genesisft.com

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