The downtrend in the lean hog market discussed in this blog November 13 ("Feb Hog Trends - No Really) has strengthened. As expected, the contract has moved through initial support near $89.40, a price that marks the 33% retracement level of the previous uptrend from $78.375 through the spike high of $94.90. The question is now, how much lower will the contract go?
The 50% retracement level of the previous uptrend is down near $86.65, with the 67% retracement market near $83.90. The commercial outlook of the hog market remains neutral to bullish, with Feb to April futures spread holding between the five-year average (for this time of year) and five-year high. Given that possible support, the downtrend could be limited to the 50% retracement level.
Weekly stochastics are also slowly moving lower. After establishing a bearish crossover above the 80% level the week of October 28, the faster moving blue line is down to 45% while the slower moving red line is at about 55%. Both could be approaching the oversold level of 20%, and possibly a bullish crossover, when the futures contract nears the above mentioned price support level of $86.65.
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I've talked a number of times recently about the stiff resistance the corn market has met at its 20-day moving average. The couple of times a contract has breached this line over the last many months, raising hopes of a possible bullish breakout, sellers have rushed in to fill the hole. Wednesday's close of $4.36 1/2 was the sharpest break of this resistance in months, the 20-day moving average was calculated near $4.31 1/2, possibly giving the market enough momentum to finally extend its move.
If it does, it will confirm the establishment of a minor (short-term) uptrend indicated by the bullish crossover of daily stochastics back on November 8. That day saw the March contract post a bullish key (at the time) reversal on its daily chart, leading to the faster moving stochastic (blue line) cross above the slower moving red line. However, the contract failed to generate continued buying interest, ultimately moving to a new low of $4.18 1/2 this past Monday.
But this time looks different, like the contract may actually be able to build some bullish momentum. With the March contract priced near the lower-third of the 5-year price distribution range, it is possible noncommercial traders could view the market as undervalued, leading to a round of short-covering. As discussed in previous blogs, a similar situation was seen in Chicago wheat recently, leading to a solid, yet short-lived rally.
While the major (long-term) and secondary (intermediate-term) trends in soybeans remain up on the monthly and weekly charts respectively, the daily chart for the January contract is showing the minor (short-term) trend has turned down. This isn't an overly surprising development, given recent market signals.
First, the contract was testing technical resistance between $13.26 1/2 and $13.45 1/4, prices that mark the 50% and 61.8% retracement levels of the previous downtrend from $14.06 (high from August 27, 2013) through the low of $12.47 (November 5, 2013). At the same time, daily stochastics (bottom study) crept back above the overbought level of 80%. Combined, this left the contract vulnerable to a round of noncommercial long-liquidation, particularly with the latest CFTC Commitments of Traders report (positions as of Tuesday, November 26) showing noncommercial traders holding a net-long of 154,794 contracts, an increase of 11,632 contracts from the previous week.
The crossover in stochastics (faster moving blue line crossing below the slower moving red line) looks to be occurring below the 80% level, meaning the sell-off could last only a few days. Support is pegged between $13.08 1/4 and $12.84 3/4, prices that mark the 38.2% and 61.8% retracement levels respectively of the previous uptrend from the November 5 low ($12.47) through Monday's (December 2) high of $13.46. Also notice that Monday's activity established a bearish reversal on the daily chart, another signal that the contract should work lower.
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Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.
As December gets under way the Chicago wheat market seems content to move sideways. However, the not too distant futures could see major (long-term) momentum indicators swing to a more bullish outlook. If so that would mean the recent low of $6.35 1/2 (August 2013) should hold.
You may have to take a close look at the monthly chart for Chicago wheat, particularly if your eyes are as bad as mine. You will notice that the more active contract has been holding between support near $7.00 1/2 and 6.24 3/4, prices that mark the 50% and 61.8% retracement levels of the previous uptrend from $4.25 1/2 (June 2010) through the high of $9.47 1/4 (July 2012).
Also, monthly stochastics (second study) show the market to be in an oversold situation with both the faster moving blue line and slower moving red line below the 20% level. However, also notice that these two are coming together as the futures market holds support, setting the stage for a bullish crossover (blue line crossing above red line with both below 20%) possibly by the end of this month.
Fundamentally the market remains neutral at best, despite the solid weakening of the carry seen over the last couple of years (third study, green line). This could change dramatically at the end of this month though as the March to May Chicago spread takes the lead after the December contract expires December 13. As of this writing, the March to May spread is showing a carry of only 5 cents, reflecting a far more bullish commercial outlook. This could prove to be enough incentive to spark another round of noncommercial short-covering, providing the buying interest needed to start a major (long-term) uptrend. CFTC Commitments of Traders reports show this group holding a net-short futures position of 55,079 contracts in late November (bottom study, blue histogram).
Combining all these factors (futures holding support, momentum indicators in oversold situation, increasingly bullish spreads, and noncommercial short-covering) the upside target would be $8.87 1/2, the 50% retracement level of the previous major downtrend from the spike high of $13.49 1/2 (February 2008) through the previously mentioned low of $4.25 1/2. If the spreads turn more bullish, an extended rally to the 61.8% retracement level of $9.96 1/2 is possible.
Corn: The spot-month contract closed 13.00cts lower. The major (long-term) trend remains down. The nearby December contract posted a new low of $4.10 3/4 in November while monthly stochastics have dipped below the oversold level of 20%. These oversold conditions, combined with the more active March contract trading near the lower-third of the 5-year price distribution range, could begin to slow the downtrend.
Soybeans: The spot-month contract closed 70.25cts higher. The major (long-term) trend remains up. The January contract posted a secondary bullish outside month, trading outside the October trading range before settling higher. This follows the bullish key reversal registered in August. Monthly stochastics remain bullish as well. Initial resistance is near $13.71, the 33% retracement level of the previous downtrend from $17.89 through the low August 2013 low of $11.62 1/2. However, given the continued bullish commercial outlook indicated by the inverted forward curve, the market should see a 50% to 67% retracement, putting the long-term target area between $14.75 3/4 and $15.80 1/2.
Wheat: The spot-month Chicago contract closed 1.25cts higher. Despite the higher close, the major (long-term) trend remains down. Monthly stochastics are below the oversold level of 20%, indicating a possible move to a sideways trend until a bullish crossover is seen. Technical price support remains at the previous low of $6.35 1/2 (August 2013).
Cotton: The spot-month contract closed 0.96ts higher. The major (long-term) trend is sideways. Technical support is at the low of 66.10 (June 2012) with the high-side of the range near 93.90.
Live Cattle: The spot-month contract closed 1.525 higher. The major (long-term) trend remains sideways. The more active February contract is testing the previous high of $134.50 (December 2012) while monthly stochastics are near 80%, indicating the market is overbought. Long-term support remains near $113.67, a price that marks the 33% retracement level of the previous uptrend from $79.975 through the previously mentioned high.
Corn can make another notch on its wall as its major (long-term) downtrend lasted through another month. The move that started in August 2012 following the establishment of the high at $8.43 3/4 has now reached 15 months long as the nearby contract posted a new low of $4.10 3/4 in November. The last time the corn market was priced this low was back in August 2010 (top chart, dashed red line).
A look at the long-term monthly chart gives market bulls few reasons to believe corn is going to turn any time soon. Next major support is at the previous low of $2.96 3/4 (from September 2009). Monthly stochastics (second study) have moved into an oversold position below 20%, but appear to be a number of months away from establishing a bullish crossover.
Fundamentally the market seems to have stabilized, with the carry in the nearby futures spread (third study, green line) holding at a neutral level. The 9 1/4 cent carry in the December to March spread amounts to approximately 51% of the full cost of carry, with bearish being anything greater than roughly 66% and bullish anything less than about 33%. It should be noted that if the trend in the nearby spread continues to move sideways, and the trend in the futures market remains down, the percent of total cost of carry will increase reflecting a more bearish commercial outlook.
But there are a few bullish factors as well. The month of November saw noncommercial traders (according to weekly CFTC Commitments of Traders reports) trim their net-short futures position (bottom study, blue histogram) 115,220 contracts at the end of October to just under 70,500 contracts in late-November. With the March contract priced near the lower-third of the 5-year price distribution range, this group could view the market as underpriced and continue to cover (buy back short futures).
One last thing, the 5-year seasonal index for corn shows that both futures and cash (DTN National Corn Index) tend to post a low the close of the first week of December, next week. From their both markets embark on an uptrend that tends to last through the spring. We'll see if the seasonal tendency can trump the major trend this year.
The soybean market continues to grow more bullish, as indicated by the establishment of a secondary bullish outside month on the long-term monthly chart. This follows the bullish key reversal posted in August, a pattern that coincided with a bullish crossover by monthly stochastics (second study). Combined, these two technical signals indicate the major (long-term) trend is up. The secondary outside month posted in November means the more active contract (the January issue) traded below the October low of $12.61 3/4 before rallying above the October high of $13.18 3/4 and closing higher for the month.
A look at the monthly chart shows initial resistance is near $13.71, a price that marks the 33% retracement level of the downtrend from $17.89 (high of September 12) through the August 2013 low of $11.62 1/2. Given the continued bullish commercial outlook, reflected in the inverted nearby futures spread (bottom study, green line) the market would be expected to see a 50% to 67% retracement. This puts the longer-term target between $14.75 3/4 and $15.80 1/2.
It is also interesting to note that, according to CFTC Commitments of Traders numbers, noncommercial traders are adding to their net-long futures position (third study, blue histogram). While the latest numbers will not be available until Monday, December 2, the previous report (for the week ending Tuesday, November 19) showed this group holding a net-long futures position of 143,162 contracts. This compared to the 131,254 contracts at the end of October, and the 165,762 contracts at the end of September.
As I talked about in Tuesday's (November 26) On the Market column, "The Titanic", the corn market is staying afloat because of support from the commercial side of the market. National average basis remains firm with the DTN National Corn Index (national average cash price) holding at 21 cents under the March contract. This is roughly 4 cents stronger than the five-year average of 25 cents under despite the fact USDA is projecting record production and total supplies, and near record ending stocks for the 2013-2014 marketing year.
We also use futures spreads (price differences between contracts) to read the market's view of supply and demand. If the deferred contract holds a strong premium over the nearby contract, a carry situation, the market's view of fundamentals is considered neutral to bearish (generally). The stronger the carry, the more bearish the fundamental outlook is. Using a chart showing these spreads, an increasingly bearish spread will show a downtrend, meaning the nearby contract continues to lose ground to the deferred contract.
A look at the chart for the 2013-2014 corn futures spreads shows the trend to be sideways for both the March to May (green line) and May to July (blue line). As with most sideways trends, this reflects a period of indecision by the commercial side of the market as they continue to see how this year's cards are played.
If USDA is right though, and supply and demand is so decidedly bearish, why aren't the spreads trending down? As I talked about in the column, there are a couple of reasons. First, the futures market has slowly been grinding lower. Remember that the degree of bullish, bearishness, or neutrality of a spread is gauged by how much of the total cost of carry (total cost of holding grain in commercial storage), by percent, the spread covers. Therefore, if the nearby futures contract (e.g. March corn) moves lower while the corresponding futures spread (e.g. March to May) holds steady, the spread actually accounts for a higher percent of the total cost of carry, and therefore reflects a more bearish supply and demand situation.
The second possible reason is that farmers are refusing to sell grain at this time because of a) the low price of the market, and b) many don't need the income in 2013. This forces commercial traders to support the spreads and basis in an attempt to source enough supplies to meet demand.
As for the trend in the spreads, after all this is a blog about technical things, keep an eye on some key levels in the March to May and May to July spreads. Support in the former is at the 8 3/4 cent carry level, with the previous low in the latter at 7 1/2 cents carry. A move below these marks would indicate a downtrend has begun, likely reflecting an increasingly bearish commercial outlook.
The February live cattle contract established a secondary (intermediate-term) downtrend with its bearish key reversal the week of October 13. The contract then consolidated for a period of four weeks, before last week's meltdown led to a test of initial technical price support near $131.10, the 38.2% retracement level of the previous uptrend from $124.025 through the high of $135.45 (week of October 13).
This week has seen the contract stabilize, holding above last week's low of $131.25, yet unable to establish a strong rally. As the contract's weekly chart shows, the next move should be down as weekly stochastics (bottom study) remain bearish. Notice that stochastics established a bearish crossover (the faster moving blue line crossing below the slower moving red line above the overbought level of 80%) in conjunction with the bearish key reversal. This would imply that while the contract could see periods of consolidation, the trend won't turn up again until stochastics fall below the oversold level of 20%.
What will be the likely catalyst to drive the market down? Fundamentally the live cattle market remains bullish, as indicated by the strength of the February to April futures spread (not shown). Comparing this spread to its five-year numbers, the February contract is holding at its strongest level versus the April for this time of year. This would confirm the projected tight supplies in USDA's monthly Cattle on Feed reports.
So if the pressure isn't expected to come from commercial side, noncommercial selling will likely push the market down. Weekly CFTC Commitments of Traders reports show this group decreasing their net-long futures position from its high of 67,836 contracts (week of November 4) to 65,491 contracts (through the week ending November 19). While the bullish fundamentals should keep this group from moving to a net-short futures position, it is possible further liquidation could be seen in the weeks ahead.
This structure (bullish fundamentals, long-liquidation by noncommercial traders) puts the price target near $129.75, the 50% percent level of the previous uptrend. Normally, bullish futures spreads limit a sell-off to the 33% to 50% range before noncommercial buying interest is reignited.
Watching the corn market erode is similar to watching the Grand Canyon, well, erode. One is slowly working lower due to a constant flow of disinterested traders, the other the workings of the Colorado River over time. Both are interesting, in their own way, with neither showing patterns of sudden change.
Given its higher open interest totals the March corn contract has assumed the role of most heavily traded from the December. And with the December contract facing first notice day this coming Friday, the day after the Thanksgiving holiday, even more attention will turn to the March contract by the weekend.
If we look at the weekly chart for March corn, we see an all too familiar pattern. The market is trending sideways to down, posting a new low every few weeks just to keep traders on their toes. The most recent such occurrence was last week, when the contract dipped to $4.20 before closing at $4.30. This week started off with a bang as the March contract posted an almost 3-cent trading range during the CME Globex session through early Monday morning. Could it be the early effects of tryptophan kicking in? Possibly.
Even though there is little going on in the corn market, a few nuggets need to be watched. First, weekly stochastics (second study) are far below the oversold level of 20%, with the faster moving blue line near 8.7% and the slower moving red line calculated near 8.1%. The fact the blue line is higher than the red line would indicate a bullish crossover has occurred, implying that the next secondary (intermediate-term) trend should be up.
As we know, trends (price movement over time) tend to reflect noncommercial activity, so if the secondary trend is turning up (possibly) it would stand to reason that the noncommercial side of the market would be buying. Weekly CFTC Commitment of Traders numbers show this group holding (week ending Tuesday, November 19) a net-short futures position of 70,499 contracts (third study, blue histogram), a slight reduction of 635 contracts from the previous week. If this group continues to cover their net-short futures position, possibly back to near par, it could be enough support to spark a modest rally in the March futures contract.
But why would this group cover their short position? For starters, the commercial outlook has grown less bearish recently. The market's view of fundamentals (supply and demand) is reflected in the trend of the futures spreads. The nearby December to March spread has seen its carry whittled from 13 cents (week of October 6) to only 6 3/4 cents as this holiday week gets under way. The move in the March to May spread (bottom study, green line) hasn't been as dramatic, but has seen the carry weaken slightly from 8 3/4 cents (week of October 21) to 8 cents. Corn's forward curve (series of futures spreads from the Dec 2013 contract through the Sept 14 contract) shows a neutral level of cost of carry (total cost of holding grain inn storage). This could be enough to spur noncommercial traders to a near flat futures position (nearly the same number of contracts sold as bought) by year's end.
If all this happens and March corn does rally, how far could it go? Technically, initial secondary resistance is pegged near $5.03 1/2, a price that marks the 33% retracement level of the previous downtrend from $6.71 through last week's low of $4.21. This seems a bit high. If we use the activity in Chicago wheat from September as guide, the upside target is trimmed considerably.
In wheat, noncommercial traders went from a net-short futures position of 55,828 contracts to a net-long futures position of 10,216 contracts over the span of five weeks, rallying the December contract about 12%, coming up short of its 33% retracement target before falling again. A similar move in corn lowers the target in the March contract to about $4.70.
Corn: The December contract closed 0.25ct higher. The secondary (intermediate-term) trend is sideways in corn. After posting a new low of $4.10 3/4 this past week, the December contract was able to close fractionally higher.
Soybeans: The January contract closed 39.00cts higher. The secondary (intermediate-term) trend is up. The January contract posted a bullish outside week (traded above the previous week's high, below the previous week's low, and closed higher for the week), its second such pattern over the last three weeks. Weekly stochastics remain long-term bullish, short-term neutral. The next upside price target is near $13.45 1/4.
Wheat: The Chicago December contract closed 5.00cts higher. The secondary (intermediate-term) trend on the wheat chart remains sideways to down. The December Chicago contract continues to hold above its previous low at $6.35 1/2 (week of August 11). According to the latest CFTC Commitment of Traders report, noncommercial traders increased their net-short futures position by 6,878 contracts through the week ending Tuesday, November 19.
Cotton: The March contract closed 0.97cts higher. The secondary (intermediate-term) trend is down. The March contract posted a bearish outside week (traded above the previous week's high, below the previous week's low, and closed lower for the week) indicating the market could see continued pressure. Weekly stochastics are indicating the contract is sharply oversold and could soon turn sideways.
Live Cattle: The December contract closed 3.00 lower. The secondary (intermediate-term) trend is down. The February contact is testing initial support between $131.65 and $131.10, prices that mark the 33% and 31.8% retracement levels of the previous uptrend from $124.025 through the high of $135.45. Next support is pegged at the 50% retracement level near $129.75.
Soybeans are bullish. That should be enough to set the market on a long-term uptrend, but as anyone who has watched knows, it hasn't been. Contracts continue to fluctuate between bullish and bearish, rallying only to fall again, all while the last major (long-term) technical signal and 2013-2014 forward curve (series of futures spreads reflecting the long-term commercial outlook) remain bullish.
That is until this week. A look at the weekly chart for the January contract shows another bullish outside week, confirming the previous bullish reversal established the week of November 3 (note that the low of this pattern, $12.47, was a test of support calculated near $12.48). Both patterns would indicate that the secondary (intermediate-term) uptrend should begin to strengthen. If so the next upside target is pegged near $12.45 1/4, a price that marks then 61.8% retracement level of the previous downtrend from $14.06 through the previously mentioned low of $12.47.
Those familiar with my analysis will make the connection that a secondary uptrend tends to reflect increased noncommercial buying interest, a factor that would seem to be confirmed by weekly CFTC Commitment of Traders numbers (bottom study, blue histogram). Friday's report (positions as of Tuesday, November 19) showed this group increasing their net-long futures potion to 143,162 contracts, up 13,198 contracts from the previous week.
Continued bullish signals on the weekly chart are in step with the bullish key reversal seen on the market's major (long-term) monthly chart back in August. And with one week left in November the January contract is nearing a secondary bullish outside month, needing only to close above October's settlement of $12.66 1/4. The contract closed this week at $13.19 1/2.
The bottom line is that soybeans continue to grow more bullish, but will need to see renewed noncommercial buying in the coming weeks to move the market toward its next major price targets of $13.71 and $14.75 3/4.
Seasonally, the distillates (heating oil) market tends to post an initial low in mid-December and a secondary low in late-January. After that the spot-month contract tends to rally about 17% through the first week of July, according to its five-year seasonal index (weekly closes). This month has seen the spot-month contract increase 3% from its low weekly close of $2.8719 (second week of November), raising the question of whether or not the market is starting an earlier than normal seasonal uptrend.
The answer, from a technical point of view, is probably not. A look at distillates' weekly chart shows the spot-month contract is in a sideways trend. The upper end of this range is at $3.2254 (the high from the week of August 26) with the low end at $2.8285 (the low the week of November 4). Using these two points, the mid-section of the current sideways trend is between $2.9801 and $3.0738 (blue lines), prices that mark the 38.2% and 61.8% retracement levels of the previously mentioned range.
Weekly stochastics (bottom study) help us differentiate between trend types. A close look at this study shows the last major crossover occurred the week of September 12, 2012, just as the spot-month contract was in the process of establishing a double-top formation near $3.2668 (high the week of October 8, 2012). This bearish crossover above the overbought level of 80% offset the previous bullish crossover below 20% that occurred the week of June 25, 2012. Since then distillates have been trending sideways in an ever narrowing range, as marked by the dashed trend lines (top side red, bottom side blue).
Some may be asking about the apparent crossovers by weekly stochastics since then. If you look closely, these have occurred below the 80% and above the 20% levels, signaling that the secondary trend remains sideways. And with the last major crossover again being bearish, the classification of the trend would be sideways to down.
Therefore, distillates would look to test the resistance area mentioned above before turning lower once again. However, the next sell-off could result in a test of the previous low only, if the low-side trendline continues to provide support. This could put technical support closer to the $2.8500 price level, possibly pulling weekly stochastics back below 20% and in position for a major bullish crossover indicating the beginning of the seasonal uptrend.
A little over a month ago I posted a blog talking about the downtrend building in the January feeder cattle contract (October 15, "Falling Feeder Cattle"). At that time the contract looked to be in the process of establishing a double-top near $169.50, in conjunction with weekly stochastics showing the market to be sharply oversold. Combined these would indicate feeder cattle were set to move to a downtrend with an initial price target between $162.25 and $161.20, the 33% and 38.2% retracement levels of the previous uptrend from $147.90 through the high of $169.425.
This week the January contract has posted a low (so far) of $161.875, within the expected range for initial price support. However, with weekly stochastics still closer to overbought than oversold, the contract should see continued pressure. If so, the next price target is the 50% retracement level of $158.85.
As expected, noncommercial traders have been reducing their net-long futures position, with last Friday's CFTC report (positions as of Tuesday, November 12) showing this group holding 6,629 contracts net-long. This was a decrease of 880 contracts from the previous week, and down substantially from the high of 10,882 contracts the week of October 21. As long as this group continues to sell, look for the January contract to remain in its downtrend.