The Futures / Inter Market Report

Trading the World’s Markets                            

April 25, 2008

                                            
Matthew Caruso, CMT                                  
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Rough Rice reaching long-term top

            As I have repeatedly said in past reports, one of the best indicators for a top or bottom is your nightly news. I have been reading and watching numerous news articles on the global crisis caused by very quick price increases in rice. Governments are now hoarding the commodity and refusing to export it. People unfortunately are starving and rioting. All of this is unsustainable and the crisis will be resolved and the very fact that news reports are now giving it so much attention is a sign that the crisis will be over very soon. 

            If the news coverage wasn’t bearish enough, we also have intense selling by commercials who would know best that these prices are not likely to remain at these levels and are selling as much future production as they can. This can be viewed in figure 1. As well, advisory sentiment (not so smart group) is very bullish (can be seen in figure 1) and is showing the unanimous belief that prices will keep climbing. What I also find very interesting is that we are just about at a seasonal top for rice (seasonal trend in figure 1 as well). The concept of studying a seasonal trend has always been applied most frequently in the commodity markets such as the grains because there is an actual physical growing and harvesting season which affects prices since there are times in the year where supplies are typically high and times when they are low. Therefore it makes sense that a rice crisis is occurring at a time of year when supplies are tightest and this pressure should be alleviated by the fact that we are entering a time of year where prices typically fall due to changes in supply. I feel it is so important to keep technical analysis and the reality of life combined. We are not studying charts because they cause events, rather we are reading through the charts what events are being anticipated through the buying activities of others.   

            Therefore we currently have commercials who know best what price a commodity should be valued at, selling more than ever. As well, advisors who are removed from the reality of what commodities should be valued at, are bullish due to their emotions driving their buying. Lastly, in all the mayhem people have forgotten that rice prices are typically weaker for the rest of the year due to the natural rhythm of growing and planting (More lower). 

Figure 1 chart by genesisft.com

            For anyone who is new to trading and has the impression that this time things are “different” for rice I want to show you the following chart, figure 2. The top part is the same chart shown several weeks ago before the big break in soybean prices. In case you forgot the aftermath, you can see it in figure 3. What we are looking at is a parabolic rise in rice as we saw in soybeans. It is a stage in a market rally where the climb in price feeds on itself and begins to spur a higher rate of increase in prices. It is similar on the downside as we saw this January in stock prices. What is important to see is a big increase in the weekly range of the commodity to the point where it is the largest range of the entire move. We saw that in soybeans and we see it now in rice. At this point the majority of buying is due to momentum, as well as fear that prices will climb much higher and people believe it needs to be bought now if companies are to operate profitably and if people are to eat. Also the greed by speculators drive prices higher due to their belief that they will miss out on the biggest profit of their careers. When prices finally reach the exhaustion point, this massive group of people are in a situation they need to get out of quick and prices then virtually collapse as there is a scramble by a lot of people to get out through a narrow door. I think that a failure in momentum will spell the death of this rally. If the low of any week is broken, it is likely that it will sell off big time. Stay vigilant as prices will get very volatile.

Figure 2 chart by genesisft.com

Figure 3 chart by genesisft.com

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