These are the profound words of Mark Twain. Although no two markets are exactly alike, today I’ll examine the phenomenon known as “blood in the streets,” an occurrence that repeats throughout market history. I’m not giving you investment advice here; rather, I’m presenting two specific commodities that are potentially ringing the bell you hear at, or near, the bottom.

In previous letters, I’ve discussed the recent commodity meltdown. Last week the dollar was trading at seven-month highs and gold closed below $800 an ounce for the first time this year. The master commodity, crude oil, is now more than $30 a barrel off its highs, and this is a major reason for weakness in the outside markets.

I’ve been looking for commodities as an asset class to bottom out as the Olympics come to an end. Beijing has effectively shut down 350 industries and an estimated 7 million cars are off the roads. No wonder world oil consumption is down. Just a 1-million-barrel swing in demand can swing the world’s marginal demand from a shortage to a surplus condition.

As oil goes, so goes a host of commodities. The stock markets of the world are bouncing, but after a 25 percent break from the October top, an 8 percent to 9 percent upside correction is considered normal for a major bear market. Certainly, most of the major markets and asset classes are related today.

Bottom picking is tricky. Markets in bear trends will exhibit sharp, short-covering rallies at times, and bottoms rarely occur in a “V” (straight down, then straight up). Still, I see signs in two commodities that bottoms are forming. This often takes place after the blood in the streets, and this is what blood in the streets looks like.

September 2008 Silver

Silver collapsed last week, falling more than 40 percent from the top, dropping 20 percent from week-earlier levels, with a $1.42-an-ounce break on Friday, 60 cents above the overnight lows. There may have been a bigger silver break in history, but I don’t remember it. This is the blood in the streets seen at market bottoms as the last weakening longs capitulate.

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However, from a longer-term perspective, silver has retraced 50 percent of the major move from the November 2001 lows to the March highs, and this would be a perfect place for this market to find support.

Consider this: It was a similar collapse that formed the bottom last year, almost to the day, Aug. 16, 2007.

My point here is to remember Mark Twain’s words.

Let’s now turn to corn, another market that’s shed blood lately.

First, I’ll tell you a story about the 1995 bearish crop report that lead to the development of certain trading rules regarding market action and corresponding market news.

We were moving from Minnesota to Lake Tahoe, driving along Interstate 80 on the day of the report, Aug. 11, 1995. I had a large, long position in December corn. At that time, the crop looked good and nobody anticipated that the final crop would be smaller. I must have had my reasons for being long, but my hopes were dashed following the report’s release.

I remember calling my assistant from the road when he told me, “Limit down.” The crop report was so bearish, describing the early calls for the upcoming crop. The market was expected to open below the 10-cent-per-bushel limit.

The early banter was the market would open limit down and “lock,” meaning I could get stuck in my position with only offers to sell limit down and no bids at that price. I sweat out the remaining 90 minutes prior to the market’s open, trying to decide how I could get out of this mess from the road. I asked my assistant to call me right before the market opened to give me a blow-by-blow.

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The market opened sharply lower, falling 7 cents, but not limit down. In other words, the market gave me–and anyone else who was long–a chance to get out and save our skins prior to a limit down move. But instead of trading lower from the open, my assistant told me corn was beginning to trade higher. It felt as if a cloud was lifted, and my nervousness disappeared. I told him to place a stop on our entire position just below the opening price of $270.

I continually checked in that day, but the stop was never hit. When the market traded higher, I knew we were safe. As it turned out, that $270 low registered because of the bearish news. And it wasn’t challenged for the rest of that year. It was a significant low that held up for years and served as the springboard for one of the biggest bull moves in history. By the next year, because of crop problems in the US and globally–China turned from the largest corn exporter in Asia into an importer–corn prices had doubled.

December 1995 Corn

And this all started with the bearish August crop report.

Now let’s turn to this year’s report, which was released Tuesday. It was considered very bearish, and the market traded to new seven-month lows, down to $505 in early trading.

A bullish sign was hit as soon as the market crossed above Monday’s closing price of $517. The market closed higher that day, up the 30-cent limit on Aug. 13 and rose another 19 cents the following day. But Friday the market was down 27 cents.

Is this action setting up the classic “test of the lows” before the next major bull market begins? Time will tell. Remember that history never repeats, but it certainly rhymes. I’m planning to flash a new corn buy signal for Futures Market Forecaster subscribers if the market action confirms my opinion next week.

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Risk Disclaimer
Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the “Holy Grail.” Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.