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Drozd: “V-tops” cap rallies

V-tops are one of the most difficult chart patterns to analyze because of the suddenness in which they form. A V-top indicates a trend reversal, with dynamic and substantial price drops often occurring with the formation of this pattern.

V-tops have three essential components:

  1. Prices must be in an uptrend, with a near vertical move.
  2. A pivot point is reached which marks the extreme high price level. While this is most commonly a single trading session, wherein the buying pressure reaches a climax, it could also be composed of a few days of trading at or near the high price.
  3. The third condition requires the most judgment. It is the sudden emergence of a downtrend. One may not be certain that a new trend is underway until the price decline has progressed too far to be of significant value. An aid in recognizing this downtrend at an early stage is to compare the slope of prices during the decline to the slope of prices before the pivot. If the angle of decline is approximately equal to the angle of advance, the pattern is more likely to be valid.

Caution must be exercised with V-tops, as by the time the pattern is clearly identified, the price move may have just about run out of steam.

Market psychology

While V-tops can be difficult to predict, the actions of the traders are not.

Since the market is in a vertical rise prior to the V-turn, the longs are making money and the shorts are being wiped out. With this pattern there is barely any room in between.

When the turn comes, often on the heels of some shocking news or political development, such as the recent credit crisis, the psychology of the market instantly turns 180°. Emotions probably run higher in a V-turn than with any other chart formation.

If the V-top pattern occurs in the absence of any news or explanation, it could initially be less dynamic, but the motivation to preserve profits or cut losses quickly takes hold.

Without news to explain the sudden turn, longs may at first misjudge the turn as merely a correction in the bull market. This is a big mistake! The market plummets as long liquidation kicks into high gear, just as we have been experiencing recently, as traders sell to bail out of their long positions.

Another contributing factor to the market’s decline can be fresh shorts entering the market. We have yet to see this develop to any extent as evidenced by the declining open interest since the market’s peak. Technically speaking, a market going down with declining open interest is generally considered a weak move down.

At the time of writing (Oct. 8), the corn market is oversold from the recent decline in price and overdue for a bounce. Prices are challenging an area of support identified by the two intersecting “lines of support” on the accompanying chart.

Recently grain prices have been in a free fall caused by long liquidation in response to the credit crisis. Although it is never easy to predict a bottom, if the grain markets are truly entering an era where they begin trading a new higher range, it will be important for corn prices to remain above $4 per bushel.

David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corporation. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis in the markets influencing agriculture. The information contained herein is deemed to be from sources that are reliable, but its accuracy cannot be guaranteed. Visit us online for more educational tools and ideas about grain marketing, or call toll-free 1-888-274-3138.<

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