Some Thoughts on Corn and the Commitment of Traders

Those of you who trade the grains as I do are well aware of the importance of this Monday's upcoming USDA grains report. We will get a fresh look at the yield numbers and the overall size of the crop based on the latest from USDA as well as what the expected changes in the final carryover will be for the 2014-2015 marketing year.

It is no secret that we are expecting record corn and bean crops. The only question is what size? Traders such as myself are going to be especially interested in the carryover numbers expected.

Heading into this report however, we have had a huge rally in the bean complex as well as generally higher prices in corn, after it made a low near $3.20 at the beginning of October. It has since rallied some $0.60 higher in the face of a record crop which has most traders confounded and left scratching their heads looking for a reason to justify a move of this extent.

It did back down a bit this week as expectations began to circulate that we would get some higher numbers based on what the private firms were saying as well as some anecdotal type reports from long-time crop watchers/observers.

I want to make an especial note that these USDA reports more often than not produce some violent moves. Many traders tend to move to the sidelines ahead of them therefore to avoid getting caught in the usual crossfire that erupts when the numbers hit the wires.


I have noticed something however that I feel is worth mentioning. In going over the Commitment of Traders reports, I was struck by the size of the NET LONG positioning of the LARGE SPECS heading into this report. To put it bluntly, they are banking on a very bullish report.

Take a look at the following COT chart and note the blue line. That is the combined NET position of the LARGE SPEC category. As of Tuesday this week, it is the largest it has been since May of this year. As a matter of fact, it is at levels commensurate with late May when they began to exit and move out from their heavy long side exposure in earnest, eventually reaching a net short position in the process.  ( NOTE the price chart where this is detailed).

Here is what should make any trader a bit nervous about this...

If this report is not strongly bullish, given the fact that corn has rallied to the extent it has over the last 5 weeks, one has to be concerned that there is now a hefty contingent of these large specs sitting on the net long side of the market waiting for this report to essentially confirm their bullish bias. While the report may yet to prove bullish, it is going to take a much lower than expected yield, a lower ending carryover, or a lower planted/harvested acreage number than what the market has built in heading into this report to provide the additional fuel required to push this market much higher in my view.

As I see this thing, the corn has essentially been pulled higher by the antics of the meal market, which as I have been commenting rather frequently of late, has been dragging the entire grain floor higher alongside of it. The strong fund buying in the meal then spilled into the beans, which then spilled into the corn.

But here is the interesting thing - the number of OUTRIGHT LARGE SPEC LONGS has not seen near the volatility as has the number of OUTRIGHT SHORTS. Look at how relatively stable the long positions have been versus the sharp moves up and down in the number of outright short positions.

To put it bluntly, the vast majority of this move in corn, both down from its peak in May and now HIGHER, from its valley in October, has been caused by sharp fluctuations in the number of short positions held by these large speculators which dominate our markets.

It has been my experience that a market which moves higher due more to the fact of an overwhelmingly larger amount of short covering, than BRAND NEW LONG POSITIONS being added, lacks the necessary ingredients to support a bullish trend remaining intact.  In other words, that move is suspect.

Those of you who have been reading here for any length of time at the site, know quite well that I have often commented on the inability of gold to sustain rallies due to the fact that the largest component of the move higher  during the current bear market has been based on short covering and not NEW LONG positions.

I suspect the same thing with corn. When the shorts are finished being run out, who is left to buy up at these levels? Answer - not many, especially when they realize that a record crop is coming. For now, the bulls, aided by nervous shorts, have been able to push this market well off the low made in early October as the final size of the crop was becoming known. Harvest delays, meal rallies, etc, have been the fundamental justification to support that rally.

Will the report we get this coming Monday turn out to be the swan song for the large specs or will they be proven to have been correct? We shall certainly see.

Big Reversal Day for Gold - But will it Last?

That's the question on a lot of minds as a result of the huge upside day in the gold market today.

Gold essentially managed to erase nearly all of the losses on what was began as a big technical downside failure but ended up leaving both sides a bit unsure as to what to expect next.

From my perspective, you had a combination of two things at work here. The first is the payrolls number which came in a bit on the low side of what the market was looking for. In and of itself, the number was not that bad but the market seemed to be looking for a reason to rally and that was as good as any.

But what compounded the move higher was the reports of Russian tanks moving in Ukraine. That was just too much for the already nervous shorts and out they came in droves.

I mentioned the other day about the psychology at work in what the gold perma bulls constantly harangue us about whenever gold experiences a sharp selloff, namely, their poorly dubbed, "Flash Crash".

"GET ME OUT AND GET ME OUT NOW" at any price is the psychology at work on the longs when selloffs are the case. Once the computer selling kicks in, that attitude then takes over. Today it was the bears screaming the same thing, "GET ME OUT AND GET ME OUT NOW" as prices MELTED HIGHER.

Of course, just as all it takes to get a move lower is a few big sell orders, all it takes to get things rolling on the upside like today is a few big buy orders. Computers on the way down and computers on the way up. It is that simple.

Take a look at the daily chart first. That is most impressive!

The price posted a huge outside reversal up day today. Coming after an extended decline like gold has experienced, it is therefore significant from a technical analysis perspective. It indicates that the market is SOLD OUT for now.

Those who have been short should have covered most of their shorts during today's session so as not to lose the tremendous profits that they have accrued over the last couple of weeks. That is where a great deal of the buying originated from today.

Here are some things that I am watching however which, while I respect the day's action, I am noting as obstacles the bulls have yet to overcome.

First is the ten year moving average ( in BLUE). Note it is still declining and note that the rally has not made it back to even this initial of key technical levels. In spite of the tremendous rally today, that 10 day is still lurking overhead. I should also note that it is ABOVE the key downside breakout level of $1180.

The test for the bulls comes early next week to see whether or not they can prove that the breakdown below $1180 was a bear trap or whether this is just another one of those violent short covering rallies that come so often in gold during its bear market and which only serve as higher selling levels from which new bears can enter the market or existing stronger hands can add to their short positions.

The verdict remains out on this in my view but I am keeping an open mind. Previous experience with gold is that it tends to put in these violent upside rallies only to then disappoint with little in the way of additional upside follow through. Will this time be different? I honestly do not know so therefore I am observing.

One thing that the gold bulls have working in their favor at this time however is the confirmation in the gold mining shares as evidenced by the strong chart action in the HUI.

Here is its chart...

Notice that it filled that overhead gap serving as resistance. That is impressive and needs to be respected. Was it an exhaustion gap signifying the end of the move and a final bottom in what has been an inexorably brutal bear market in the gold shares or is this merely the beginning of a new sideways pattern forming above the low of the week near the 146 level? Subsequent price action next week will go a long way towards clearing that up for us.

However, if you take an intermediate term view of the gold chart, that casts a bit different light on the metal which urges some caution about getting too bulled up.

Here is the weekly chart of gold. Some of you will recall this from some previous posts I made when the metal broke down below chart support at the triple bottom near $1180.

Notice that you have what chartists will refer to as a "hammer" pattern, which derives its name from price action "hammering out a bottom". However, this is the key - the CLOSE remains below the former triple bottom of $1180. I would very much prefer to have seen the market recover that broken triple bottom before turning more strongly bullish. Right now I am ambivalent.

Why? Because i am unsure whether this is merely a return to that level to test to see whether or not the same eager sellers are present or is this a move indicating a stronger move higher that can possible recapture a "12" handle?

Again I do not know as we will have to wait to see what we get next week before saying with much certainty. Right now any guesses are just that, GUESSES, and successful traders do not become successful by trading guesses.

If the bulls can take the price ABOVE $1180 and keep it there to end next week, then we have something. If not, I suspect we will see a new range trade develop at a lower level with the bottom near $1130 ( this week's low) and the top wherever the pattern develops.

I will get some more up later on when I have a chance to go over the COT stuff. Suffice it to say it is an easy matter to expect significant short covering will not show up on this week's report. That all happened today!

In the meantime I am worn out from trying to keep my sanity trading beans and cattle, which have both been all over the place as the computers have shoved them around relentlessly this week, especially the meal.

Monday we get a major USDA grains report and perhaps we will see some semblance of normalcy come back to the grains and get rid of some of the volatility that is jerking traders all over the place. But then again, given the brave new world of electronic screen trade and computers incessantly firing off buy or sell orders in huge quantities, I tend to doubt it.

LBMA Announces ICE gets the Gold Fix

In what will obviously make the Intercontinental Commodity Exchange crow to annoy the CME Group, the London Bullion Market Association announced that it has picked ICE to manage the Gold Fix.

The new electronic fix will commence in early 2015 with 11 firms intending to participate.

This will be interesting to watch as it ushers in a new age for the gold fix and brings it into the 21th century. One can only hope that is functions smoothly and efficiently and above all, with increased transparency.

At this hour, gold is showing excellent chart performance as shorts are getting pushed out. Here is a quick chart. We now have some solid technical support levels that have formed as well as resistance levels that will make analyzing this market a bit easier.

As you can see, it has pushed past the first zone of resistance noted on the chart. The market looks to be experiencing what I and some other long time traders refer to as a "melt up". It continues to work its way higher as one can see groups of shorts covering as the market refuses to give up much ground on the upside. That causes some who come in to sell into the rally to jump back out which then tends to feed the further upside progress.


I am still most interested in how this thing will close today. Mining stocks are having a nice rally as well with their upside performance bettering that of the actual metal. That is a good sign if one is bullish. Also, that HUI/Gold ratio is correctly somewhat today after striking all time record lows this week.

By the way, there are some reports circulating out of Ukraine that Russian tanks are moving. That is keeping some safe haven buying which can be seen in the upmove in the bonds and the unwillingness of the Yen to move lower.

Payrolls Friday - Lots of Volatility

Payrolls number disappoints Wall Street could be the headline for today's trading session. The always volatile number came in at +214K against expectations of a +233K. The rate of unemployment fell to 5.8% versus market expectations of 5.9%.

The numbers for September were adjusted upwards to +256K from +248K. Also, the August numbers were kicked up as well going from +180K to +203K.

As always, the data unleashed a round of furious price action across the currency markets, and by default, the gold market. Most are seeing the numbers as having a bit of something for all sides.

Those reacting to the headline number registered their disappointment by selling the Dollar, especially in favor of the Euro.

However, those who were looking at the monthly average since the beginning of the year, were doing the opposite. Analysts pointed out that the average number of jobs created this year has been +220K/month, something not seen since nearly a decade ago.

A key data point inside the report was the fact that average hourly wages rose 3 cents to $24.57. A lot of traders, including yours truly here, are closely watching that important number. Remember, it is my view that the reason inflationary pressures have yet to show up in the economy is because wages have been flat/stagnant. If, and this is a HUGE "IF", we were to see a trend in rising hourly wages develop, that might be the catalyst that could shift the current deflationary psyche to one more of an inflationary bias. It is certainly not here now but we are all watching.

The data did little to convince market players that the Fed is going to move on the interest rate sooner rather than later. Most still expect something to happen on the front mid year next year. Shortly after the data was released however, one of the Fed governor's, Mr. Mester was quoted as saying that the report was: " a pretty solid jobs report across the Board". He also noted that the "unemployment rate is a pretty good indicator of improvement in the Labor Markets".

The Fed has been very vocal about stating its close scrutiny of the labor markets ahead of today's reports in their various statements coming out of the FOMC meetings.

I am interested in seeing how the dust settles today before making too much of the early price action. As I said, there is a little of something for everyone in this report.

The Dollar moved slightly lower as an initial reaction to the report but in the tmie it has taken me to type these comments, it has since stabilized and remains slightly higher. Gold is taking its cues directly from movements in the Forex markets.

No telling where all this will end today so buckle your seat belts and stay tuned.

Wild Volume in Overnight Gold Trade

Lions and Tigers and Bears, Oh my! Flash Crashes and Reverse Flash Crashes and Swings, Oh my!

That pretty much sums up what is happening at this hour as I watch the overnight trade. It is not only in gold, but I am seeing some very strange things occurring in the December meal contract as well.

Keep in mind what I wrote the other day about those in the gold perma bull camp who are always crying up their "Flash Crash" crap as evidence of some sort of price fixing conspiracy. Also, note that they are deathly silent on what I have sarcastically countered as "Reverse Flash Crashes".

Well, guess what? We got both in one evening, separated by 90 minutes! The first occurred on heavy volume of upwards near 6000 contract that dropped gold $10 in 15 minutes. The Reverse Flash Crash occurred on even HEAVIER VOLUME and completely erased the losses from the "Flash Crash" and then some.

There is currently staggeringly huge volume in the December meal contract taking place at the 10:00 PM Pacific Time Zone hour. There has been more volume done than what occurred during the final 15 minutes of the pit session trade in the grains and that is one of the busiest times of the day.

I have no idea what is taking place but I can say this with certainty, computers are going nuts this evening.

I have said it many times before and will do so again - welcome to the new normal in our broken markets. When the exchanges voted to move to electronic trade, they opened a Pandora's box of idiocy.

Euro Falls on ECB Stimulus Plan

The Euro went one way ( down ) and stocks went the other ( up ) when comments from ECB President Draghi hit the wire this morning.

What caught the attention of the Forex crowd, and the equity guys, was the indication that the Central Bank's program of buying asset-backed securities would last for two years. That news was not in the markets.

Traders are interpreting it a evidence that the ECB is taking a more concerted stance at staving off the deflationary issues currently afflicting the Eurozone.

Here is a chart of the Euro.

The common currency has fallen through a temporary support zone that had formed near the 1.250 region. Depending on its subsequent price action for the remainder of the week, it appears headed for a test of 1.2250 zone.

Here is one of the Dollar as a result:

From a technical analysis perspective, the Dollar remains on a relatively unhindered path for a test of its June 2010 high near the 89 level basis the USDX.

As usual, strength in the Dollar is weighing on gold this morning. I noticed that it had briefly popped its head into positive territory early in the session this morning but once the Draghi comments hit the wire, it sank lower. Traders see these various efforts by the Central Banks as evidence of deflationary pressure which is tending to reinforce the "there is no inflation" theme, especially as they see weaker crude oil prices. Still, the metal has been able to pull away from its worst session low which occurred overnight. A fair amount of that selling in the overnight session looks to me to be margin related.

A brief comment on USDA grain export numbers this AM. Beans were strong once again but cancellations did indeed show up in the meal. Once again it was China that was the big buyer of US beans which continues to surprise me given the ongoing state of the US harvest and the cost differential between US origin beans and S. American origin beans.

I should note however that a total of 651,000 metric tons were cancelled from "Unknown". Speculation will be rife as to whom that was and whether or it is the tip of the iceberg. That has caught my attention.

On the meal side, a total of 306,800 metric tons of meal sales were cancelled this week. That is rather significant. There were sales of 183,300 metric tons so the NET RESULT was the cancellation of 123,700 metric tons of meal sales. If the idea was to ration meal until the pipeline was able to be replenished, it is certainly working.

HUI Long Term Chart

The West Greets Gold with More Selling

The selling kicked off in gold last evening when the comments from the Bank of Japan's Kuroda hit the newswires and has not let up as trading moved into the West.

Please refer to the chart I posted last evening showing the various support levels for the metal. The first zone of support, near the $1150 level, has been shattered conclusively. Gold now looks to have its eye on the psychological round number of $1100.

As usual, the gold perma-bulls are screaming their usual nonsense about "Flash Crash" once again. Funny how we never hear a peep out of these nitwits when we get what I have contemptuously dubbed, "the Reverse Flash Crash".

The point they are making is what? That big sellers unloaded on the metal during the Asian trade? And this is supposed to be proof of what?

Has it ever occurred to these Johnnie one-notes that there are some longs in SERIOUS trouble in the gold market? The latest Commitment of Traders report showed large speculators overwhelming LONG and WRONG in the gold market ( and this does not even include the over the counter markets). They are abandoning gold in droves.

The assumption that these perma gold bulls sites make is that "this would not be done if a LEGITIMATE SELLER wanted to ensure the best possible price". Again, who says that a trapped long wants the best possible price? The only thing a trapped long wants is "OUT".

"GET ME OUT before I am ruined" is what the motivating force is behind such moves.

I have to shake my head at the appalling ignorance that somehow passes for sound analysis in the gold bug community when it comes to the breathless commentary on gold whenever there is a sharp fall in price. Those of you who are regular readers at this site are keenly aware of what has been transpiring in the soybean markets of late. I have been especially detailed in discussing the meal markets in particular. If you want to see a market in which one group was "engineering a reverse flash crash" ( My words denoting sarcasm) just go back and look at the price chart of December meal. Panicked shorts were saying the same things as panicked gold longs were saying: " GET ME OUT AT ANY PRICE BEFORE I AM COMPLETELY RUINED".

These huge volume spikes speak of fear, panic and devastating losses all being compounded by margin calls from busy margin clerks at the various brokerage houses.

The idea that somehow huge sell orders in gold indicate the presence of "market manipulation" is patently absurd. We see this sort of thing all the time in the futures markets as one side or the other gets run over whenever a key technical support level gives way to the downside or a key technical resistance level is taken out on the upside.

Of course those that are on the winning side of a market move are going to press their advantage. That is a REGULAR occurrence in the futures market and is simply how they work. Ask the feeder cattle bears who had been obliterated by the bulls in that market since late August until only just recently if the ones doing the buying were interested in "buying at the best possible price". That one should even venture to ask such an insipid question would betray a breathtaking ignorance.

The simple facts are that gold is in a bear market and those who remain long are losing tremendous sums of money. Some have had enough and are done with the metal from the long side. Expect to see more of this the longer it takes gold to show any signs of stability. Each fresh push lower will take its toll, both psychologically and financially on the remaining longs. Bears will push until the downside momentum slows and then they will halt their selling. It really is that simple.

At some point the bleeding with temporarily halt and a respite will follow. Objective traders will watch key indicators to see if they can discern where and at what level.

I might point out here at the risk of incurring even more wrath from the gold cult members, but in the hope of waking some of them up, that their whistleblower hero and priest, the one who keeps regaling them with claims of special insider information about "massive gold buying", "massive rally of epidemic proportions", etc,. has once again proved to be nothing but a bag full of hot air. Wake up out there. Gold is in a bear market. That is what you really need to realize.

Until such time as the charts indicate a true bottom and a true turn in the direction of the main trend, rallies are going to be sold. Maybe the US Dollar will become weak, maybe inflation will begin to become a problem, maybe the commodity sector will turn sharply higher, maybe the GLD will start showing strong inflows of money with rises in its reported holdings, maybe this and maybe that, but until you see something on the fundamental front change that favors sharply higher gold prices, just remember a very simple but always ignored axiom: " The trend is your friend".