Today I'm sitting down with EWI's chief commodity analyst and Futures Junctures Service editor Jeffrey Kennedy to discuss the recent drama in the grain market king, corn.
Nico: On January 12, corn prices plummeted more than 6% in the market's worst slump in three months. And, according to the mainstream experts, one main factor drove the grain to its recent pain: "Corn prices plunge on higher supply forecast... after a US Department of Agriculture report said global production will exceed demand for the first time in three years." (Bloomberg)
Are they right?
Jeffrey: No. Most explanations based on "fundamentals" are post-factum, which means they appear AFTER the market has made a meaningful trend change. The fact of the matter is, corn's most recent leg down began long BEFORE that January 12 USDA report was released.
Nico: Ah yes. That brings me to your December 30 Daily Futures Junctures' "Weekly Wrap-up." In that publication, you presented the following chart of corn that clearly anticipated a significant sell-off in the days and weeks ahead. Let's start at the beginning.
Nico: First, we have a large decline in wave (1) from early November to early December. What is the exact nature of this structure?
Jeffrey: This is a classic five-wave impulsive Elliott wave pattern. They adhere to three main rules:
1. Wave 2 never moves beyond the start of wave 1
2. Wave 3 is never the shortest wave among waves 1, 3, and 5
3. Wave 4 never enters the price territory of wave 1
You will also notice another characteristic of impulse moves on this chart of corn. They are always followed by a three-wave corrective move in the opposite direction.
Nico: Hence, the A-B-C rally for wave (2). But there are several a-b-c structures out there. Which one has developed here?
Jeffrey: The pattern is a classic zigzag formation. This is a simple, three-wave pattern with a 5-3-5 subdivision, where the top of wave B is noticeably lower than the start of wave A -- and, wave C travels well beyond the end of wave A.
Nico: In the December 30 DFJ chart, you identified two potential topping areas for wave (2) between the $6.60 and $6.90 per bushel area. What guidelines helped you determine those price targets?
Jeffrey: One popular guideline of Elliott waves states that wave 2 often retraces a Fibonacci .66 to .81 of wave 1. That created probable "book ends" for the wave (2) rally in corn prices: the $6.60-$6.90 area.
Nico: Now that corn fell as you expected, what indicators are you watching to signal whether the wave (3) decline has reached its end?
Jeffrey: Well, I reserve such information for my subscribers. I can tell you, though, that I am watching substructure and momentum indicators very carefully and reporting on all new developments in my Futures Junctures.
Nico: Thanks so much, Jeffrey.
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