Published: August 30, 2010

As long as market volatility continues to be a driving force in the markets, understanding which way market pulses are pushing stocks, currencies, and commodities will be a necessary part of smart traders' research cycle. With that in mind, I wanted to take a look at where the market's headed now -- and one soft commodity that I see gaining big in 2010...

The equity market sell off was triggered by weak June trade deficit numbers that showed weak US exports and a shocking (to some) increase in US imports. The S&P 500 reacted negatively -- in part from a tired market condition -- as the attempt to push above the June highs failed. The 10% move higher off the yearly lows was looking to correct as investor sentiment remained fearful and cautious.

Also contributing to the extreme bearish pressure in the last few weeks was the accumulation of built up protective stops from the month long market climb. When prices moved lower standing exit sell orders were triggered, which sent prices lower and so on.

The sell orders below increased the magnitude of the move. When the smoke cleared, most major indexes were sitting on mid-sized losses for the month.

Not So Deep Digging
But all is far from lost. You see, this recent price action was not a change in the near-term trend but rather a standard pull back to support levels. The S&P's 1065 level held strong and most importantly for a bullish strategic mindset, new lower lows were not made after the gap last week. This can be interpreted as a positive when the market was on its heels additional selling did not emerge.

The VIX, which measures investor fear, was also unable to reach above 28 and break its downtrend as another positive indicator. It bounced on the sell off but did not rally with subdued concerns of more selling. Combined with the S&P support holding at that 50% retracement of the 1130 high, and no spike in the VIX tell that last week may have been an isolated event.
 

The dollar has since turned back lower as the two-day temporary bounce on flight to quality purchases has dissipated. All signs are positive if the stock market can get some catalyst to start the climb again with the majority of earnings behind us. Remember, second quarter numbers are what drove the market on its last run.

Taking a Look at the Commodities
With that economic data behind us, let's take a look at what's happening in the commodities...

For starters, the dollar decline is a much-overlooked aspect of the recent rally we've seen in grain.

US grain is much more attractive to global buyers with the present currency discount. That has added another layer of price support with additional demand to push corn and beans higher last week. The extreme highs from August 5th are within range as both closed nearly 10 cents higher on the week with renewed buying. Wheat in contrast lost 25 cents for the five trading sessions and awaits new fundamental drivers.

Adding even more support to grain prices, namely corn, was this August 13 analysis from the Dow Jones Newswires:

The potential for increased global demand for U.S. corn as a result of reduced production of alternative feeds propelled U.S. corn futures. “People are starting to realize that U.S. corn exports could exceed U.S. Department of Agriculture estimates released Thursday,” said Terry Reilly, analyst with Citigroup in Chicago. World feed markets will have less wheat and barley production from Russia and Europe as a result of extreme droughts, and that will make U.S. corn attractive to importers as a cheaper alternative feed source, Reilly added. Prices jumped Thursday after the U.S. Department of Agriculture increased its forecast for corn exports in 2010-11 by 100 million bushels, or 5%, from July to 2.05 billion bushels. The demand outlooks overshadowed record projected U.S. production, allowing the market to break away from the influence of the volatile wheat market.

Bullish news like this is finally starting to get digested in the corn market. Remember, until now all we've heard is news of a bumper crop for corn -- but, as I've stated before, high expectations can let you down. I'll be keeping an eye on the grains in the weeks to come...

[Ed. Note: If you want to make a direct bet on rising grain prices, there are plenty of options available to you. Some of the easiest plays can be found in grain ETFs, which track baskets of grains that trade on commodities exchanges. A couple of options include the iPath Dow Jones UBS Grains Total Return Sub-Index ETN (NYSE: JJG) and the PowerShares DB Agriculture Fund (NYSE: DBA).]

-- Alan Knuckman
Editor
Resource Trader Alert

Note: This article originally appeared on Penny Sleuth