Below is an excerpt from a weekly column called “A Scientific View” written by Hedge Plus owner Patrick Hayes. In this column dated August 7, 2014 Patrick talks about the different types of rallies that don’t stem simply from typical bullish fundamentals.
When I asked my staff and clients the question of what causes a rally in grains, I received answers that fit into two categories. The obvious answer is bullish news and of course bullish fundamentals. No surprise here!
The corn rally that is most dependable and easiest to enter with the least amount of risk, is a rally that does not come from bullish news or bullish fundamentals, it is a rally that comes after the biggest bearish moves of all-time.
What causes a rally after the end of the doom and gloom is the fact that emotion leads prices below fundamental levels, in other words, prices OVERREACT to bearish fundamentals. This is the reason that a 20% rally is common after a big price dip. Prices do not rally based on new bullish news or fundamentals, they rally to offset the overdone emotional extension of the price slide.
The coolest thing about a post-harvest price rally is the nature of harvest. The amount of bushels moved to market at harvest causes prices to stagnate allowing for the easiest entrance point of any bullish move.
Anticipation of a big crop cause prices to bottom BEFORE the end of harvest. The harvesting of a big crop creates a glut of corn clogging the pipeline. This scenario is the reason corn prices flatten at harvest lows, simply put, time is needed for the market to absorb the big crop (we have all seen the piles of corn at the local elevator after a big crop). It is my take that the flat bottom of a price slide into harvest allows for market participants to buyback with easy points of entry and close support levels (see chart below for an example of a harvest low flat price bottom).
Simply put, we see a post-harvest buyback as one of the easiest and one of the least risky trades that you could enter.