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SCENARIOS AND OUTCOMES
1. The market can open higher and close higher. (Bullish) 2. The market can open higher and close lower. (Bearish) 3. The market can open lower and close lower. (Bearish) 4. The market can open lower and close higher. (Bullish) There are no easy answers to trading; however, in general terms, Nos. 1 and 4 constitute bullish price action, with Nos. 2 and 3 representing bearish price action (at least for that day). Furthermore, when a trader considers the market’s reaction to significant news, there are six possible scenarios:
5. The news is bullish; the market opens higher and
closes higher. (Bullish) We consider Nos. 5, 8 and 10 to be bullish price action; in these cases, the market’s either responding to bullish news (which is bullish) or not responding to bearish news (also bullish). Nos. 6, 7 and 9 constitute bearish price action. In these cases, the market’s either responding negatively to bearish news (bearish) or not responding positively to bullish news (also bearish). To summarize:
Now let’s put this all to work. There was a major crop report released Oct. 12. The news was bullish for corn; the record large crop size wasn’t increased by the US Dept of Agriculture (USDA) as most analysts expected it would be--a bullish surprise. The corn market opened higher and closed higher. (See No. 1 and No. 5 above.) Both actions are considered bullish. December 2007 Corn
Source: Commodity.com The news for wheat, the tightest projected carryover supply since 1949, was bullish. The wheat market opened lower and closed lower. (See No. 3 and No. 7, both bearish.) December 2007 Wheat
Source: Commodity.com The soybean news was bullish. (It had lowered acres and no yield increases.) The soybean market opened higher and closed lower. (See No. 2 and No. 6, both bearish.) November 2007 Soybeans
Source: Commodity.com To summarize:
So how can we use this information to potentially profit in the marketplace? I should point out that most analysts are currently bearish for corn because of a record large crop now being harvested, resulting in record large projected supplies. Because of low acres and the associated smaller crop, most analysts are bullish for soybeans. The consensus for wheat remains bullish because of tight supplies and huge demand despite high prices. The market action after the crop report for these three crops was totally contrary to the common wisdom. It’s certainly possible these actions in the marketplace may be random events and only temporary. In this case, the market should turn “rational” at some point and begin to again move in the direction the fundamentals suggest. However, market action is more important than the news and should be respected. The corn market action is of particular interest. The crop size is record large, with ending inventories near 2 billion bushels, also a record large bearish number. The USDA estimated corn demand for ethanol to be down 100 million bushels from its previous estimate and cattle numbers (still the largest corn demand source) projected to be down 6 percent into early next year. There are reports of corn being piled on the ground in some areas of the Midwest because storage facilities are plugged up. So why was the Oct. 12 market action bullish? To be honest, I don’t know. But I do know this price action needs to be respected, and in the long run, the market’s always right. Let me share with you a story from corn history: Back in August 1995, the corn market was in a bear trend. A major crop report was released on Aug. 11, 1995; this report was considered bearish. That day, the market opened lower on the report news at $2.70 per bushel, but it closed higher. Corn didn’t trade below $2.70 for the remainder of the year, closing the year out at $3.43. We now know there was bad weather, which reduced the crop size that year, but it didn’t take place until after the report day. How did the market know what was going to happen? To be honest, I don’t know. But the market was right that year. December
1995 Corn The analysts didn’t see this coming during the winter of 1995. They were generally bearish, but the market somehow knew. This was the story of the biggest rally in corn market history; that high price has never been exceeded to this date. And it all started with a bearish crop report the market failed to react bearishly to. I’m not recommending establishing a position in any market based on one day’s price action. What I’m saying is, over time, if the market action is contrary to the news, we must respect the market. Bottom line: If corn prices continue to firm up during the next few weeks, you may reasonably conclude something very bullish is going on in the corn market--perhaps a major price bottom with the associated profit potential. Good luck, and good trading.
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