It appears the seasonal tendency for corn prices to move lower in March may be over, due to the bears being unable to push prices below an important line of support on the December 2011 futures contract.
This is also the point at which a reversal pattern called a Harami materialized on the candlestick chart. A harami indicates a change in trend. Prices quickly bounced back up, and will now need to exceed resistance and have a decisive close above $6.20 to confirm the seasonal low is in place, and to keep the main uptrend intact.
As illustrated in the inset on the accompanying chart, in terms of candlestick colors, the bullish harami is comprised of a black candlestick preceding and engulfing a small white candlestick.
Because the bullish harami is an indication that the minor downward correction in this bull market was reversing, it signaled that this was a good time to attain a long hedge. The smaller the white candlestick relative to the black candlestick, the more likely the reversal will occur.
Candlestick charting provides an insight into market activity that is not readily apparent with the conventional bar-type charts. When you see a black body, you know the sentiment is bearish, and a white body is bullish.
The Japanese method of charting is called candlestick because the individual lines resemble candles. The exact same data used in traditional bar charting (open, high, low, and close) is all that is required.
The daily line shows the open, high, low and close. The thick part, or candle, is called the body. It highlights the range between the open and close. If the close is above the open then the body will be white. When the body is black, this simply means the close was below the open.
The lines above and below the body represent the high and low ranges for the day and are called shadows.
The long black body illustrates a bearish period in the market with an opening near the day’s high and the close near the day’s low. Conversely, a long white body shows technical strength with an opening near the low and a close near the high in a wide range period.
Market psychology: The harami signals a change in sentiment. On the first day the shorts are comfortable and confident due to the weakness in the market as evidenced by the long black body (A). The news is bearish, so it provides encouragement and the anticipation of additional gains.
The second day’s activity is not what the shorts expect, as prices open above the previous day’s close and ultimately settle slightly higher than the opening, which is reflected by the small white body (B).
The traders who are still short the market, are bewildered by the market’s strength and begin to question the market’s inability to go lower. The shorts respond to strengthening prices by exiting the market. This begins to fuel the buying. Those who fear they’ve missed the buying opportunity, also find themselves chasing the market higher, as they enter additional market orders to buy before the market goes higher.
This particular harami was especially effective because it developed at a major line of support. The more reasons one can find to substantiate a change in trend – the more likely are the odds of it occurring. Therefore, the odds were high the market would turn up. Savvy livestock producers were wise to respect the harami and purchase additional feed grain requirements before prices resumed the main uptrend.
A decisive close above $6.20 on the December 2011 corn futures contract is needed to keep the main uptrend intact. Once this is accomplished, it would open the door for prices to move up and challenge the contract high of $6.61, which was established on July 11, 2008.
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— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about grain marketing advisory services, or call us toll free at 1-888-274-3138 for a free consultation.