Technically Speaking
Darin Newsom DTN Senior Analyst

Monday 09/03/12

Dec Chi Wheat Turning Bearish

An initial look at the weekly chart for the December Chicago wheat contract shows a continued consolidation pattern indicating the market could continue to trend sideways. However, a closer look at key market factors shows the situation could be more bearish.

Source: DTN ProphetX

To begin with, the contract continues to trade toward the lower end of its sideways range created by the bearish key reversal posted the week of August 26 (6 lines in from the right on the weekly price chart). The contract posted a new high of $9.53 1/4 before posting a low of $8.64 1/4, below the previous week's low of $8.71, and closing lower for the week. At this point the contract indicated its trend had turned down. This was confirmed the next week by a bearish crossover in weekly stochastics (second study) above the 80% level indicating the market was overbought.

A move to a downtrend in a market usually reflects increased selling by noncommercial traders. In this case, the noncommercial long futures position (third study, blue histogram) shows that this group's position has been relatively stable up until this past week (ending Tuesday, August 28). According to last Friday's weekly CFTC Commitments of Traders report this group reduced their long futures holdings by about 9,700 contracts.

Why would this group liquidate, putting more pressure on the market? Take note of more bearish commercial outlook indicated by the carry in the December to March futures spread (fourth study, green line). Recently, this spread has been in a downtrend from an inverse of 23 1/4 cents the week of July 16 to a carry of 10 cents at the end of August. Notice that this move to a more bearish view of supply and demand coincides with the early stages of the downtrend in the market and leads noncommercial long-liquidation by six weeks. Also, market volatility remains high at 38.9%.

Recall the recent discussions in corn and soybeans. When faced with a scenario of high prices (the December Chicago wheat contract closed in the upper 10% of the five-year price distribution range this past Friday), elevated volatility (almost 40%), and an already large long futures position (still near 150,000 contracts); noncommercial traders tend to sell rather than buy. Throw in a less bullish commercial outlook (downtrend in futures spread), and the market is increasingly vulnerable to a selloff.

How far could the December Chicago wheat contract fall? Seasonally the SRW market tends to post an initial high weekly close in late September before falling 15% through mid-November. If the high weekly close of $9.48 1/4 (posted the week of July 16) is seen as an early seasonal high, a target low weekly close would be near $8.05. Another way of calculating a price target is to take the sideways range ($9.53 1/4 less $8.64 1/4 equals 89 cents) and subtract it from the low end of the range, anticipating a bearish breakout. This creates a possible target of $7.75.

Note that these two target prices ($8.05 and $7.75) fall almost equally on either side of projected price support level near $7.91. This price marks the 50% retracement of the previous uptrend from $6.29 1/2 through the above mentioned high of $9.53 1/4. Given the still neutral level of carry in the December to March futures spread, a 50% retracement would be expected.

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Posted at 9:35AM CDT 09/03/12 by Darin Newsom
Comments (3)
any updates on wheat technical picture with the strong close wheat had to finish last week..........
Posted by JeremeyFrost at 9:37PM CDT 09/09/12
With a frost hitting the Australian crop and a possible wheat embargo in Russia would this change your bearish forecast
Posted by WARREN HARDY at 10:10PM CDT 09/09/12
My apologies for a slow response. Jeremey, the Dec Chicago contract remains in a holding pattern near its recent highs. However, it does keep edging toward the low end of the range. Weekly stochastics continue to show a bearish crossover meaning the trend could turn down, reflecting renewed noncommercial long-liquidation. Bottom line, the technical picture remains bearish for now. Warren, all good fundamental points. However, the thought process behind technical analysis is that fundametnals are built into trading price. Therefore, if the market turns down it must not be overly concerned. As you know I look at spreads for a reading on the commercial (supply and demand) outlook, and the recent downtrend in the futures spreads (Chicago Dec to March, March to May) indicates the market is growing more comfortable with whatever fundamental factors may be out there. Thanks you both for your questions and comments.
Posted by DARIN NEWSOM at 12:42PM CDT 09/11/12
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