- New Science in old markets -


While stocks gyrate in a range, there has been little to say about grains for many weeks. It is the time between harvests almost everywhere with a small amount of seasonal planting going on in the Southern hemisphere. Prices are largely stuck in ranges, generating a few compression signals that we have not published as the prospect of any them 'breaking into a trend' was remote. There are some more compressions appearing now, so it is time for a review.

We have been saying all year that we think that most crop commodities are 'bouncing along the bottom' as they usually do between occasional bull market/bear market phases. The current state of most is that prices are quite low, meaning that farmers' income is also low and dependent on increased yields to make much of a profit. This is the perfect situation for a new bull market to start, so we watch keenly for any evidence that the first moves are starting. There is nothing yet, but these moves will come shortly after compressions. Ultimately, a bull market is likely to start before any real crop information is available and then accelerate upwards if a poor crop seems likely, stalling out if there is plenty of grain. This may not happen this year (or any particular year) but we like to be ready, in case.

Weekly scale charts first, just to show the levels and recent history of the 'Big 4' with no signals. These are not the usual continuous charts that you will generally see (except for the Corn chart) but the joined-up prices of sequential futures months without any adjustment for the differences between them as we shift from one to the next.

Wheat, Corn CTN, Bns wkly

Obviously, Soybeans and Corn have fallen most from prevailing levels in the Spring as the Trump/Xi trade war heated up. Wheat is probably (just) profitable for most US farmers at present levels but Soybeans, Corn and Cotton are only marginally so, depending on the exact type grown, location and whether economies of scale are available. It's tight in other words.

Looking at some individual delivery months, we have been seeing  some weekly-scale compression signals, if only in Wheat and Soybeans:

Soy &Wheat wkly compsd

Soybeans are compressing now, whereas Wheat compressed some weeks ago and is now trading below the compressed levels. This does not automatically mean that we become bearish by the way, as at least some of that drop in prices is due to Wheat getting cheaper as it gets closer - meaning the market is currently in a 'contango' as is normal. It may compress again.

These weekly-scale compressions show that pressure is building up and so we are 'set up' for a new trend. The first clues will probably come from daily-scale signals, of which we have two, also in Soybeans and Wheat:

Soy & Wheat dly comps

These daily-scale compressions are occurring frequently which probably means that volatility will increase soon. None of this tells us what to do yet, but it does warn that we should start to pay closer attention to these grain markets, which are already building up pressure - compressions signify a complete lack of agreement among market participants meaning that both short and long positions will be held with weak convictions. That leads to vulnerability to any squeeze or liquidation, which would uncover stop-loss orders. We call this 'pressure' as shorthand.

If that pressure leads to an upward move, go with it. There is advice on how to deal with (and trade) markets that are moving out of compressed conditions in our userguides - there is a short summary version under this link and a further link to a longer version at the end.

All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com