Signs of Trouble Ahead in the Ags?

Today’s market action was noteworthy for many reasons, although, a sector which caught my eye more than any other was the performance of the agricultural equity sector and the grains/softs futures markets. The sell-off in corn, cotton, soybeans, and wheat started early on this morning and continued with virtually no let up right through to the close of the pit session.

 

 

 

After looking at these charts one begins to wonder if Fed Chairman Bernanke knew something yesterday when he stated that the recent spike in commodity price inflation would be “transitory”.

 

Cotton has had a very bad month of April, thus far $CT_F has fallen over 30% from its early April highs above 2.10.

The daily chart of cotton should serve as a stark reminder to traders/investors currently playing in the commodity space as to what can happen when gravity grabs hold of a commodity which had more than tripled over the last fourteen months.

Potash ($POT) reported record quarterly earnings this morning, however, investors sold the stock aggressively in textbook ‘sell the news’ fashion. Moreover, one must remember that commodity related equities trade almost entirely based upon the future outlook (minimum 6-9 months) for both pricing and sales volumes. A glance at the charts of $AGU, $MOS, $POT tells me that the agricultural/fertilizer sector is not healthy and will need some time to repair their charts.

 

$AGU is forming a classic potential head and shoulders formation with a neckline at around 86.50. Before that area is tested the recent bottom rail uptrend line will come into play around 87.50-88.

 

 

$POT printed a large red candle that cut through the 100-day SMA like a hot knife through butter. The bulls should make a stand in the 54-54.50 area before things get really ugly and the 200-day SMA comes into play.

I remain bullish longer term on the ag story, however, in the short term there is no sense in fighting the tape. Summer is also usually a seasonally weak period for commodities in general. My pal Josh Brown (The Reformed Broker) has been all over the long term agriculture bull market for well over a year. Here are some of his recent posts on this subject:

http://www.thereformedbroker.com/2011/03/31/cornography/

http://www.thereformedbroker.com/2011/04/13/peak-fish-and-other-insights-from-agriculture-2-0/

http://www.thereformedbroker.com/2011/03/23/is-there-a-moores-law-for-corn/

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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