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{The Corn Mania, the Ethanol Boondoggle, and Candlesticks}
By plrprousers | February 3, 2009
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We’ve all heard about the South Sea Mania and the Tulip Bulb Mania. We remember being told about the disaster in which they ended. The dramatic rise in stock prices since 1995 was a mania, too. It took prices to a high in year 2000 and then to a reaction high in October 2007, from which point they have been falling almost without interference falling from then until now. If we believe that all price manias implode and end at a point which is as low as, or lower than, the level at which they began, then it necessarily follows that the Dow Jones Industrials Average will fall to its level in 1995 – say 4000.
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You could say that the advance in Corn prices which began in October 2007 and ended in June 2008 was also a mania. It was propelled at least in part by a government-inspired program which was fraudulent from its inception: the the mad rush to bring volume production of Corn-based ethanol on line. Remarkably, the product contains less energy than the quantity of energy which is necessary to produce it; and, ironically, the energy which is necessary to make it is almost totally petroleum-derived. So, from the very beginning, the whole program was based on a false premise. The whole thing was a hoax, pure and simple. It had the undesirable effect of upending the global supply-demand and cost equations for Corn, whose principal uses have always been as people-food and animal feed.
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Now the chickens have come home to roost. The mania has collapsed; and indeed Corn prices are lower now than they were at the time the mania began. It was written in the stars that it would be so.
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When we observe the Weekly chart of Corn for 2007-2008-2009 (to date), we see a vertical rise in prices in 2008 – called a “blowoff” rise – which is represented by tall white Candlestick bars for the weeks of June 6 and June 13, followed by a black bar for the following week (was that a “hiccup” or an “uh-oh” week?) and then, for the week of June 27, a tall white bar which totally surroundsthe the “hiccup” week bar. That tall white bar is a classic “Bullish Last Engulfing” pattern, both in terms of its placement at the top end of a long-established uptrend and in terms of its shape. The Bullish Last Engulfing Pattern is strongly bearish in its connotation, in spite of its name. The investor who goes or remains Long after seeing that Bullish Last Engulfing Pattern, believing that the strong uptrend willlikely continue, takes an undue financial risk. Indeed, in this case prices began to fall immediately after the appearance of the Bullish Last Engulfing formation. Prices fell almost without interruption for months, until December 2008, halting at a level at which prices were about 80 cents below those which prevailed at the beginning of the mania in October 2007.
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So, there are two morals to the story: 1) here is fresh evidence that prices in a financial mania always retrace to a point which is at least as low as the point at which the mania first began to emerge; and 2) the Candlestick Bullish Last Engulfing Pattern is a bearish omen that should be taken seriously.
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http://www.commoditiesjunction.com
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