As its monthly chart shows, when June came to an end the most active futures contract was trading near major (long-term) support at $11.43 3/4. This price marked the 50% retracement level of the previous uptrend from the low of $4.98 1/2 (February 2005) through the high of $17.89 (September 2012). However, the November contract wasted little time in blowing through that support in early July, nearly leaving a bearish gap down in the process (the June 2014 low was $11.51 1/2, the early July high was $11.58 3/4.
July saw the November contract also move below the low of $10.94 1/4 from December 2011, setting the stage for a test of support between $9.91 1/2 and $9.28 1/4. These prices mark the 61.8% and 67% retracement levels respectively, a price are that didn't look possible given the robust inverse in the market's forward curve for much of the last few years.
Even as the market comes to a close for July, and looks ahead to the key crop production month of August, new-crop spreads are far from bearish. The November to January is showing a carry of 8 1/4 cents, or roughly 52% of the total cost of carry (total cost of holding beans in commercial storage for that time period). The January to March spread closed at a 7 1/4 cent carry (48% total cost of carry), the March to May at 6 1/2 cents (40%), and finally the May to July at 6 1/4 cents (39%). The November to July forward curve, a carry of 28 1/4 cents, covers only 45% of the total cost of carry.
Keeping in mind that neutral runs from roughly 34% to 65%, the commercial outlook for soybeans would indicate it is comfortably neutral. That being the case, a market tends to find support at its major 50% retracement level, dipping down the 61.8% and 67% levels if the commercial outlook grew more bearish.
The problem facing new-crop soybeans is that the old-crop supply and demand situation was TOO bullish. The strong inverse still evident in the August to September futures spread ($1.24 3/4) and the August to November ($1.42 1/2) created the sharp downtrend when the chart reflecting the most active contract rolled from the July to the November.
A look at the monthly chart for the DTN National Soybean Index (NSI.X, national average cash price, not shown) paints a picture that is not quite as bearish. While the intrinsic value of the market, its cash value, has been trending down it has not yet taken out its 50% retracement level of $11.16 (low of $4.85, high of $17.48). Again given the long-term neutral view of supply and demand, and acknowledging that this view could change, I would anticipate this price support holding the sell-off in the NSI.X over the coming months.
"That Statue Moved" was a small-time band from Kansas from the late 1980's and 1990's, with one of its members the younger brother of a good friend of mine from college. What could this possibly have to do with markets you ask? When I looked at the long-term monthly chart for the U.S. dollar index, the phrase "that statue moved" was the first thing to pop into my head.
I last discussed the U.S. dollar index (USDX) back on June 2, 2014, in the blog "The Glacial Advance of the U.S. Dollar Index." Are you seeing a pattern with the terms "glacial" and "statue?" To summarize, activity in the USDX has been less than scintillating since October 2013 with the index seemingly locked in a trading range between support at 78.725 and resistance near 81.140. The former marks the 50% retracement level of the rally from the low of 72.696 (May 2011) through the high of 84.753 (July 2013). The latter is the 38.2% retracement level of the sell-off from the July 2013 higher through the May 2014 low of 78.906.
A closer inspection of the chart shows that the USDX actually did move this month. The index traded below the June 2014 low of 79.759 early in the month before rallying above the June high of 81.020 here at the end. And unless the index sees a colossal collapse the last two days of July, it appears destined to not only close higher for the month but possibly above the June high.
Those familiar with this blog will recognize this pattern as a bullish outside month, meaning the index could soon look at extending this rally in its existing sideways trend. Initial resistance is pegged at 81.829, the 50% retracement level of the previously mentioned sell-off. Longer-term resistance is pegged at 83.424, the 67% retracement level of the downtrend from 88.708 (June 2010 high) through the May 2011 low. If somehow the USDX gest through resistance at the 83.424 level and possibly takes out the July 2013 high of 84.753, it could then set its sights on the long-term high of 88.708.
That isn't likely to happen without some sort of change in interest rates by the Federal Reserve -- another statue everyone is waiting to see move.
A look at its long-term monthly chart shows the cocoa market has been in a strong major uptrend dating back to its low of $1,983/ton at the end of December 2011. During the period of consolidation that followed, monthly stochastics established dual bullish crossovers at the end of February 2012 and June 2012, indicating the major trend was set to turn up.
Note that the initial rally took the spot-month contract to a test of resistance near $2,668, a price that marks the 38.2% retracement level of the previous major downtrend from $3,775 through the December 2011 low. This led to another consolidation phase, though the trend was now up, lasting until a bullish breakout in August 2013.
As the uptrend gained momentum, notice the action of the spot-month contract as it neared the 50% retracement level of $2,879 at the end of 2013. January 2014 saw the contract trade below the December 2013 low of $2,692 before rallying above the December high of $2,844 and closing higher for the month. This created a bullish outside month, despite monthly stochastics above 80%, indicating the market was already overbought.
As we approach the end of July, the spot-month contract is testing its last retracement resistance at the 67% level of $3,178. Note that the spot-month contract traded above this price earlier in the month, but now finds itself priced just below near $3,169. Also, monthly stochastics are above 95% with the faster moving blue line and slower moving red line converging. If light pressure is seen before trade for the month comes to a close, the cocoa market could see the establishment of a bearish crossover, indicating the major trend has turned down.
And as was the case with the uptrend, this could be another somewhat unusual example of the trend in futures leading the trend in futures spreads (second chart, green line). Notice that it was only after the major futures trend had turned up did the nearby spread start its journey into backwardation (an inverse situation). With the September contract now $22 over the December as monthly stochastics close in on a possible bearish crossover, market fundamentals could once again be in a follower role.
I find the developments in cocoa interesting, as they relate (in a way) to what we see in corn. When I discuss King Corn's monthly chart early next week take note of the trend (down) and monthly stochastics (oversold, below 20%). You will see that like cocoa did in February 2012, monthly stochastics for corn established a bullish crossover at the end of March 2014. From there the nearby futures contract almost rallied 33% of the downtrend from the August 2012 high of $8.43 3/4 through the January 2014 low of $4.06 14, coming up just short of the $5.52 mark with the May 2014 high of $5.19 1/2.
The difference between corn and cocoa is that while waiting for a secondary bullish crossover by monthly stochastics, the market has easily breezed to a new low this month of $3.56 1/2. Though it will be discussed in more detail next week, the corn market may still be months away from indicating a bullish change in its major trend.
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.
Anyone who has watched the cotton market since in 2014 knows it has been under pressure, to say the least. The epitome of the struggle is the December 2014 contract, which after posting a high of 84.74 (cents per pound) the week of May 4 fell to a low last week of 64.53, a drop of about 24%. But as July is nearing its end, DTN Six Factor analysis gives market bulls in hiding a ray of hope.
First, the trend remains down. However, weekly stochastics (a momentum indicator, second chart) are in single digits, well below the oversold level of 20%. A move toward a higher close this week could lead to a bullish crossover, the faster moving blue line crossing above the slower moving red line with both below 20%, signaling a change in momentum to a secondary uptrend.
Next is noncommercial activity (third chart, blue histogram). If the secondary trend is going to turn up, noncommercial traders will need to start buying again. Last Friday's CFTC Commitments of traders report (positions as of Tuesday, July 22) showed this group moving to a small net-short futures position of 922 contracts. The question is now, why would this group cover their newly established net-short position?
The commercial view of fundamentals has slowly been growing less bearish, as indicated by the weakening carry in the December-to-March futures spread (fourth chart, green line). This factor is far from bullish with Monday morning's trade still showing a carry of 0.78 cents. However, other factors could soon come into play that might spark renewed buying interest from the commercial side, and them possibly noncommercial traders.
Monday morning finds the December contract priced at 65.70, putting it in the lower 5% of the market's 5-year distribution range. If there is any truth to the old economic rule of low prices creating demand, then both sides of the market (commercial and noncommercial) could view cotton as undervalued and ready for a rally.
Seasonally the cotton market has been following its 5-year index (weekly close only) relatively closely for much of 2014. That being the case, traders could take note that the market's seasonal low weekly close occurs the third week of July, corresponding with last Friday's settlement of 65.32 (Dec contract). From the close the third week of July through the close the last week of November, the December contract tends rally 13%. Using last Friday's close as a starting point projects a close in late November of roughly 73.80.
Notice on the weekly bar chart (as opposed to the weekly close only chart) that this would have December cotton testing resistance near 74.63 for a weekly high, a price that marks the 50% retracement level of sell-off from 84.74 through last week's low of 64.53. Given the neutral to bearish December to March futures spread, a 50% retracement would be the maximum move anticipated at this time.
Finally, market volatility remains high at 14.7%. While a possible reason for noncommercial short-covering, it could also limit potential buying interest from investors unless a dramatic change is seen in the commercial view of the market.
In a nutshell, or cotton boll if you prefer, the market appears poised for a move to an uptrend based on these six factors. This week's activity could go a long way in determining the trend for the coming months.
Corn: The DTN National Corn Index (NCI.X, national average cash price) closed at $3.43, down 8.00cts for the week. This is the lowest weekly close for the NCI.X since the week of July 19, 2010. National average basis (NCI.X - September futures) was calculated at 20cts under Friday evening, continuing to run below the 5-year average and unchanged weaker for the week. The combination of weak national average basis while the futures market trades in the lower 10% of the 5-year price distribution range reflects a continued bearish old-crop supply and demand situation. Technically the NCI.X is testing old support between $3.50 and $3.10 set from February 2010 through July 2010.
New-crop Corn: The December contract closed 6.75cts lower. The secondary (intermediate-term) trend remains down. Weekly stochastics are deep in single digits indicating a sharply oversold situation. The close of $3.71 3/4 has the December contract priced in the lower 15% of the market's 5-year distribution range. Friday's weekly CFTC Commitments of Traders report showed noncommercial traders trimming another 17,338 contracts from their net-long holdings. The December to July forward curve shows a neutral to bearish level of carry (62% of total cost of carry). Major (long-term) support in the futures market is $3.43 1/4.
Soybeans: The DTN National Soybean Index (NSI.X, national average cash price) closed at $12.24, up $0.19 for the week. The NSI.X is now priced in the lower 38% of its 5-year distribution range, a level that could continue to attract buying attention given the bullish supply and demand situation indicated by the uptrends in the futures spreads. Weekly stochastics are in an oversold position and nearing a bullish crossover below 20%.
New-crop Soybeans: The November contract closed 1.75cts lower. The secondary (intermediate-term) trend remains down as noncommercial traders added another 5,534 contracts to their net-short futures position. After posting a new low of $10.55 last week the contracts was able to post a solid rally to close at $10.83 1/2. This puts the contract in the lower 22% of the market's 5-year price distribution range. Weekly stochastics are below 20%, indicating an oversold situation. The combination of low price, oversold stochastics, a noncommercial net-short position, and weakening carry in futures spreads could spark a move to a secondary uptrend in the near future.
Wheat: The DTN National SRW Wheat Index (SR.X, national average cash price) closed at $5.07, up 5.00cts for the week. Despite the higher close the SR.X remains in a price level not seen since the week of July 12, 2010. National average basis was calculated at 31 cents under Friday, 1-cent weaker than the previous Friday and below the strongest basis for the last five years of 22 cents under.
SRW Wheat: The September contract closed 5.75cts higher. The secondary (intermediate-term) trend is now sideways. Weekly stochastics established a bullish crossover below the oversold level of 20%, indicating the contract could be seeing the beginning of a secondary uptrend. Friday's CFTC Commitments of Traders report showed noncommercial traders adding to their net-short futures position by 5,689 contracts. Meanwhile, the September to December futures spread saw its carry weaken slightly on a weekly close only basis. With the September contract priced in the lower 18% of the market's 5-year distribution range, the pieces seem to be in place for a test of initial resistance near $5.97 1/2, a price that marks the 33% retracement level of the downtrend from $7.51 3/4 through last week's low of $5.20 1/4.
The most recent CFTC Commitments of Traders report was for positions held as of Tuesday, July 12.
Brent Crude Oil: The spot-month contract closed $1.15 higher. Despite Friday's strong rally the secondary (intermediate-term) trend remains sideways to down. The spot-month is set to test resistance between $108.15 and $110.05, the 33% and 50% retracement levels of the previous sell-off from $115.71 through the recent low of $104.39. Weekly stochastics remain neutral to bearish.
Crude Oil: The spot-month contract closed $1.04 lower. The secondary (intermediate-term) trend on the weekly chart is sideways. Support remains at $101.43 and $99.48, prices that mark the 38.2% and 50% retracement levels of the rally from $91.244 through the high of $107.73. Long-term resistance remains between $104.22 and $105.25. Weekly stochastics are bearish.
Distillates: The spot-month contract closed 7.05cts higher. The secondary (intermediate-term) trend is sideways. The spot-month contract has posted a strong rally off its recent low of $2.8258. Weekly stochastics remain neutral to bullish, indicating a possible move to a secondary uptrend in the near future.
Gasoline: The spot-month contract closed 0.50ct higher. The secondary (intermediate-term) trend remains sideways to down. The spot-month contract is testing support between $2.9008 and $2.8232, prices that mark the 38.2% and 50% retracement levels of the rally from $2.4945 through the high of $3.1520. Weekly stochastics are bearish, indicating increased pressure is likely.
Natural Gas: The spot-month contract closed 17.0cts lower. The secondary (intermediate-term) trend remains down. The spot-month contract is moving toward major (long-term) support between $3.656 and $3.431, prices that mark the 61.8% and 67% retracement levels of the previous major uptrend from $1.902 through the high of $6.493. Weekly stochastics are neutral to bearish.
The rally in December gold may not be over according to technical indicators, but it has certainly lost its glitter over the last couple of weeks.
After testing resistance on its week chart at $1,341.90, a price that marks the 67% retracement level of its previous downtrend from $1,391.90 through the low of $1,241.70, the contract has fallen back to test support between $1,294.60 and $1,276.90. These prices mark the 50% and 67% retracement levels of the initial rally.
Notice that weekly stochastics (bottom chart) did not move above the overbought level of 80% before the contract turned down. This would indicate that the December gold could find another round of buying interest in the near future, possibly enough to take it back to a test of its previous high of $1,347.50.
At that point stochastics will likely be in an overbought situation, setting the stage for the establishment of a secondary (intermediate-term) downtrend.
As mentioned in Thursday's Early Word Grains, soybean basis is in its higgledy-piggledy seasonal phase where different cash merchandiser bid off three different contracts. A few are clinging to the August, some have rolled their positions to the mostly irrelevant September, while others are moving their positions out to the new-crop November. Of the three, the latter provides the most thrills with the November now reflecting both old-crop and new-crop issues.
Given that one of the keys to any market is its basis (price difference between the cash market and futures market), and soybean basis can be easily skewed at this time, the next best alternative to understanding real market fundamentals (not the one's released by USDA each month) is by studying futures spreads. As most of you know, futures spreads are the price differences between futures contracts, and remains a key defense of commercial traders against moves by the noncommercial side of the market.
In the case of soybeans, notice that the four new-crop soybean futures spreads are all indicating a move to uptrends. Led by the November 2014 to January 2015 spread (red line), the long-term commercial outlook toward soybean supply and demand appears to be growing more bullish. This is somewhat of a surprising development IF one believes recently released supply and demand figures from USDA.
For example, the government was able to increase old-crop ending stocks by taking residual use to (-69) mb, a move that is expected to precede an increase in 2013 production. The ripple effect of the higher 2013-2014 ending stocks is that it becomes 2014-2015 beginning stocks, resulting in larger total supplies and theoretically more ending stocks.
But look again at the trend of the November to January futures spread. After posting a low weekly close of a 9-cent carry (week of July 7, or the week of the last USDA report), the spread has seen its carry trimmed to 6 1/2 cents through activity this week. Important resistance on this weekly close chart is at the 6-cent carry level (close from the week of June 23). A weekly close with a carry less than 6 cents would indicate this move is more than just a rally off the recent low and that an uptrend has been established.
What is supporting the commercial side of the soybean market? Since the November is now playing the dual role of old-crop and new-crop, the answer is also two-fold. First, the rally (weakening carry) in the November to January futures spread reflects the ongoing tight old-crop supply situation as the 2013-2014 marketing year comes to an end in the face of continued strong demand. But with similar moves seen in the January to March (black line), March to May (blue line), and May to July (green line) spreads there is also indications that the market is not convinced of USDA's cumbersome ending stocks estimate of 415 mb and ending stocks to use figure of 11.7%.
Again, the normal progression for changes in trend starts with basis, then futures spreads, and finally the futures market. With soybean basis hard to read at this time, indications of a change in price direction over time (trend) by soybean spreads could ultimately lead to a trend change in the futures market.
Natural gas, also known as the Widow Maker, seldom fails to make things interesting. This month has seen the market that often marches to the beat of its own drum, consistently work lower. So much so that the spot-month contract now appears to be targeting major (long-term) support on its monthly chart between $3.656 and $3.431. These prices mark the 61.8% and 67% retracement levels of its previous rally from $1.902 (April 2012) through its high of $6.493 (February 2014).
There are a couple of interesting things to point out about this previous move. Note that the April 2012 spike low occurred the month before a bullish crossover by monthly stochastics (bottom chart, green dot). The key to this is that the bullish crossover occurred below the oversold level of 20%, indicating a move to major uptrend.
The next month, June 2012, saw the spot-month contract post a bullish outside month (trading outside the May 2012 range before closing higher), confirming the uptrend. From there the market consistently worked higher before spiking to its February 2014 peak.
The question is now, has the trend turned down? Strictly from a technical point of view, the answer is no. Yes, I know, the market has fallen from its $6.493 high to this month's low of $3.755, but the technical signals are not there to suggest a possible downtrend returning the market to its previous low.
Take a close look at monthly stochastics as the market approached its peak. Notice that there appears to be a crossover above the 80% level back in May 2013. In reality though the faster moving blue line crossed below the slower moving red line the following month, June 2013, but below the overbought level of 80%. This kept the major uptrend in place.
How did the market respond? A look at the chart shows that after a period of consolidation near $3.43 it found the strength again to extend its uptrend to its February 2014 high.
But even then, monthly stochastics could not approach the 80% level. Therefore, much like the Korean War that never officially ended, the major trend in natural gas remains up. And that being the case, the spot-month contract should find renewed buying interest at the previously mentioned price range between $3.656 and $3.431.
When should this low occur? Seasonally natural gas tends to post its low in late August, so it seems logical the market could take the next three to five weeks to establish a low for this move. Once the market makes its bullish turn, resistance would be the pocket of trade between roughly $4.20 (low from April 2014) and $4.90 (just above the high from June 2014). This range could be pinned down a bit once the low for the sell-off is established.
As always, the true measure of the strength of weakness of any market is its intrinsic value. And in the case of grains, that means the cash markets need to be watched closely as they can sometimes disagree with what is going on in the futures market. However, both seem to be in agreement at this point: Corn is struggling to find buyers.
One of the studies I like to use in my analysis really isn't technical at all, but my version of simple economics. Based on the idea that demand picks up when prices are low and slows down when prices are high, I've always used a general distribution chart based on weekly closes for the various markets. This chart tells met the percentage of time the market posts a weekly close above its current price.
Let's take another look at the DTN National Corn Index (NCI.X). The NCI.X is the national average cash price created by DTN collecting cash bid data from almost 3,000 locations across the U.S. When last Friday's information was gathered and calculated, the NCI.X came in at approximately (rounded) $3.52. This is the lowest weekly close for the NCI.X since the week of July 12, 2010.
But we all know the corn market, both cash and futures, has been trending down. I'm curious about how Friday's NCI.X relates over time. To that end, I have a number of distribution tables covering 5 years, 10 years, from the beginning of the demand market at the start of the 2005-2006 marketing year, and dating back to the opening of the 2003-2004 marketing year (when domestic demand first climbed above the 10 million bushel mark).
For this blog, as well as the one posted on July 7, I'll focus on the demand market study. On the chart, last Friday's NCI.X of $3.52 (blue column) shows that roughly 66% of the time weekly closes are higher than the current price. The 50% mark is at $4.10. However, the column that may have everyone's attention is the red one off to the left. This roughly reflects government loan price near $2.00, a level that the market has closed below 8% of the time since September 2005. It is interesting to note that the NCI.X has not posted a weekly close below the $2.00 mark since late March 2006, just as the Renewable Fuels Standards put in place by the Energy Policy Act of 2005 were starting to kick in.
The question is now, given the downtrend in the futures market that is showing no signs of slow (next major support on the long-term monthly chart is between $3.45 and $3.25), how close to loan might cash prices actually get?
If we look at the cash bid map on DTN, and trace our finger out to the western part of the Northern Plains, we see cash prices already in the low $2.00 range. If the sell-off seen early Monday holds through the close, and basis (difference between cash and futures) doesn't change, at least one cash bid could dip below the $2.00 mark with others close on its heels. If we look at DTN's Regional Index for North Dakota and Minnesota it shows an average cash price of $2.79.
Is there hope for cash corn? Again, based on the idea that low prices create increased demand one would think so. However, with projections calling for record U.S. production and reduced domestic demand (a dubious projection, in my opinion), buyers may be content to sit tight to see how far into this distribution range the NCI.X could fall before they step in.
Corn: The DTN National Corn Index (NCI.X, national average cash price) closed at $3.51, down 9.00cts for the week. This is the lowest weekly close for the NCI.X since the week of July 26, 2010. National average basis (NCI.X - September futures) was calculated at 20cts under Friday evening, continuing to run below the 5-year average and 2 cents weaker for the week. The combination of weak national average basis while the futures market trades in the lower 17% of the 5-year price distribution range reflects a continued bearish old-crop supply and demand situation. Technically the NCI.X is nearing old support between $3.50 and $3.10 set from February 2010 through July 2010.
New-crop Corn: The December contract closed 6.25cts lower. The secondary (intermediate-term) trend remains down. Friday saw the contract close near its new low of $3.78, with weekly stochastics deep in single digits indicating a sharply oversold situation. The close of $3.78 1/2 has the December contract priced in the lower 17% of the market's 5-year distribution range. Friday's weekly CFTC Commitments of Traders report showed noncommercial traders trimming another 19,970 contracts from their net-long holdings. The December to July forward curve shows a bearish level of carry (67% of total cost of carry) reflecting an increasingly bearish view of supply and demand. Major (long-term) support in the futures market is between $3.45 and $3.25.
Soybeans: The DTN National Soybean Index (NSI.X, national average cash price) closed at $12.05, down $0.23 for the week. The NSI.X posted its lowest weekly close since the week of February 6, 2012 and priced in the lower 36% of the 5-year distribution range. National average basis weakened by about 5 cents last week, though results could start to be skewed by the rolling of bids from the August contract to the November. The cash market is oversold technically meaning it could soon find renewed buying interest.
New-crop Soybeans: The November contract closed 10.25cts higher. Despite the higher weekly close the secondary (intermediate-term) trend remains down. However, the November stabilized above its recent low of $10.65 while weekly stochastics continue to move toward the oversold level of 20%. Friday's close of $10.85 1/4 put the November contract in the lower 23% of the market's 5-year price distribution range. The forward curve (November 2014 through July 2015 contracts) remains neutral at approximately 50% of total cost of carry. Major (long-term) support on the continuous monthly chart is between $9.91 1/2 and $9.28 1/4, the 61.8% and 67% retracement levels of the previous major uptrend from $4.98 1/s through the high of $17.89.
Wheat: The DTN National SRW Wheat Index (SR.X, national average cash price) closed at $5.02, up 1.00ct for the week. Despite the higher close the SR.X remains in a price level not seen since the week of July 6, 2010. National average basis was calculated at 30 cents under Friday, just below the strongest basis has been the last five years at 24 cents under. However, the 30 cents under was 5 cents weaker than the previous Friday's settlement.
SRW Wheat: The September contract closed 6.25cts higher. The secondary (intermediate-term) trend remains down, though could turn sideways if the contract is able to hold above last week's low of $5.24 1/4. Weekly stochastics are deep into single digits indicating a sharply oversold market, while the September contracts weekly close of $5.32 1/4 puts it in the lower 18% of the market's 5-year price distribution range. However, noncommercial traders continue to add to their net-short futures position with Friday's Commitments of Traders report showing an increase of 3,054 contracts. Major (long-term) support on the continuous monthly chart is at the June 2010 low of $4.25 1/2.
The most recent CFTC Commitments of Traders report was for positions held as of Tuesday, July 15.
Brent Crude Oil: The spot-month contract closed $0.58 higher. The secondary (intermediate-term) trend is sideways to down. The spot-month contract rallied off its test of support at $104.62, a price that marks the 61.8% retracement level of the uptrend from $96.75 through the high of $117.34. Resistance is pegged between $108.15 and $110.05.
Crude Oil: The spot-month contract closed $2.30 higher. The secondary (intermediate-term) trend on the weekly chart is sideways. The spot-month contract rallied off its test of support at $99.48, a price that marks the 50% retracement level of the uptrend from $91.24 through the high of $107.73. Resistance remains be $104.22 and $105.25, the 61.8% and 67% retracement levels of the downtrend from $112.24 through the $91.24 low.
Distillates: The spot-month contract closed 1.57cts lower. The secondary (intermediate-term) trend remains sideways to down. The spot-month contract is testing support at $2.8285, the low from the week of November 4, 2013.
Gasoline: The spot-month contract closed 4.82cts lower. The secondary (intermediate-term) trend is sideways to down. The spot-month contract closed below support at $2.9008, a price that marks the 38.2% retracement level of the previous uptrend from $2.4945 through the high of $3.1520. This sets the stage for a test of the 50% retracement level at $2.8322.
Natural Gas: The spot-month contract closed 19.5cts lower. The secondary (intermediate-term) trend remains down. The spot-month contract is trading well below support at $4.249, a price that marks the 67% retracement level of the previous uptrend from $3.129 through the high of $6.493. Major (long-term) support is between $3.656 and $3.431.
As hard as it is to believe, at different times this past week it seemed like the September Chicago wheat contract wanted to establish an uptrend. I know, in my latest On the Market column I dismissed wheat's chances of turn bullish rather easily, with the lone bullish factor in the market's bearish haystack being the fact it is technically oversold. But perhaps in its weakness lies its inherent strength.
Or something like that. It is far too late on a Friday afternoon to be philosophical.
It doesn't take much to see that September Chicago's weekly stochastics (second chart) are about as close to 0% as can be, with the faster moving blue line finishing the week at 3.8% and the slower moving red line at 5.7%. Like a putt hanging on the lip of the cup and not falling, it wouldn’t have taken much of a rally for weekly stochastics to establish a bullish crossover.
But it wasn't to be. Instead of holding steady near Thursday's solid close the contract (heck the wheat market in general) fell hard Friday as the idea of a downed Malaysia Airlines plane in Ukraine leading to increased demand for U.S. supplies fizzled. This allowed the September contract to fall back to near its low of $5.24 1/4 posted earlier in the week.
Pressure continues to come from both sides of the market. Commercial selling is indicated by the strengthening carry in the September to December futures spread (third chart). The 24 cents the spread showed at Friday's close is the strongest the carry has been since it became relevant, meaning the commercial view of supply and demand continues to grow more bearish.
The other side of the market, the noncommercial side (blue histogram, bottom chart), also sold this last week. Friday's CFTC Commitments of Traders report (positions as of Tuesday, July 15) showed this group increasing their net-short futures position by 3,054 contracts to 43,704 contracts. This is the largest net-short position (by noncommercial traders) since the week of February 3, 2014.
Where to now for Chicago wheat? For that we need to turn to its long-term monthly chart. The nearby September contract is in the middle of an old block of trading between $5.85 and $4.25 established between September 2009 and June 2010. Meanwhile, monthly stochastics are approaching the oversold level of 20%. Unlike the weekly study, the long-term momentum indicator already established a bullish crossover (faster moving blue line crossing above the slower moving red line below the 20% level) at the end of February 2014. Therefore, this sell-off doesn't need to dip back below 20% before a confirming crossover is seen.
Given that the September contract is priced in the lower 18% of the market's 5-year distribution range, a round of noncommercial short-covering buying could occur at any time. However, until the commercial side starts to grow more bullish potential rallies should be limited.
Soybeans have entered that odd time of year when the November contract plays the dual role of covering both old-crop and new-crop activity. Dwindling open interest in the August and a general lack of enthusiasm for the September puts more old-crop commercial attention on the November contract over the last 6 weeks of the marketing year.
Despite continued bearish weather forecasts (conditions generally viewed as favorable for the growing crop) the November contract has rallied off last week's low of $10.65. Much of the support has come from the commercial side of the market, indicated by the weakening carry in the November to January futures spread (second chart, green line).
Why the renewed commercial buying interest? First, the tight old-crop supply and demand situation was not solved by USDA taking residual use to (-69) mb in its latest supply and demand report. While it makes the columns on paper come out even, finding those additional 70 mb could prove to be difficult. This sets the stage for the carry in the November to January futures spread to possibly be whittled back to its previous peak of 6 cents (week of June 23).
Also, new-crop soybean export sales continue at a brisk pace with another 26 mb (708,000 mb) announced early Thursday morning. Questionable beginning stocks combined with still strong pre-marketing year demand could offset some of the bearishness tied to continued projections of record crop production.
As for price potential, the November contract has a window of opportunity between the July and August USDA reports to go up and close its bearish gap (top chart, red circle) left at the beginning of last week. Notice that the high side of the gap ($11.32, the low from the week of June 30) is near resistance at $11.36 1/4, a price that marks the 33% retracement level of the sell-off from $12.79 through last week's low.
With the existing carry in the November to January spread of 8 1/4 cents representing a neutral to bearish level of total cost of carry (approximately 53%), this short-term rally could be checked by the 33% retracement level with only an outside chance of extending to the 50% retracement level of $11.72.
Finally, weekly stochastics (third chart) remain bearish. While not trumping a possible commercial led rally, this technical momentum study needs to see a bullish crossover below the oversold level of 20% to confirm a move to a secondary (intermediate-term) uptrend by the November contract.
Let me begin by saying the historic rally in the livestock sector, led in large part by the live cattle market, has been driven by fundamentals. Tight supplies and continued strong demand have created the situation where the cash markets in live and feeder cattle continue to run well above the sky high futures price. And as most of you know, there is no one better when it comes to analyzing and writing about the livestock markets than DTN's own John Harrington. His "Harrington's Sort and Cull" blog and "The Market's Fine Print" bi-weekly column are must reads, not just for those in the livestock industry, but for anyone look for insightful and entertaining information.
Now for my point of view. As you know, this blog takes a look at the technical, or chart-based, side of the markets. The past months have seen me post a number of discussions on various livestock charts, usually with the bottom line of not wanting to be the first to step in front of the runaway train that has been the livestock sector.
This one could be more of the same, or entirely different. I'm not quite sure yet.
A look at the attached weekly chart for the October live cattle contract shows a market that has been in a strong uptrend, until last week. After posting a new high of $158.00 the contract fell below the previous week's low of $152.60 before closing well below that mark at $151.65. Those familiar with this blog will recognize that technical pattern as a key bearish reversal, normally associated with a turn in the market from an uptrend to a downtrend.
The problem is we've seen this same pattern in the past, most recently the week of May 19. As is easily visible on the chart, the market hardly hesitated before rallying from that week's close of $141.50 through last week's high, a gain of $16.50. But a closer look at a variety of technical studies shows what could be the difference this time around.
Weekly stochastics (second chart) have been running above the overbought level of 80% for the most part since the beginning of 2014. Over the course of the year there have been a number of instances of what look to be bearish crossovers (the faster moving blue line crossing below the slower moving red line), though none of them were in conjunction with a bearish signal on the weekly charts. Again until last week.
As the October contract finished off its key bearish with Friday's lower weekly close, stochastics posted a corresponding bearish crossover that included the important component of occurring above the oversold level of 20%. If we go back to the same technical patter from the week of May 19, we see the crossover by weekly stochastics was done with the faster moving blue line at 76.8%, slightly below the 80% level. This slight difference could be the fine line between what was resulted in a continuation of the uptrend and what might be the move to a secondary (intermediate-term) downtrend.
As stated above, the underlying fundamentals of live cattle seem to be bullish, as indicated by the still strong basis (difference between cash and futures prices). However, if we look at the October to December futures spread (third chart, green line) we see what appears to be the early stages of a downtrend developing. Based on weekly closes, the spread has pulled back from its high of $0.85 (week of June 30) to last week's settlement of (-$1.35). While this week has seen a small uptick (-$0.95), it is important to see what the next move is. A weekly close below last week's settlement would signal a strengthening downtrend (more bearish commercial view of the market) while continued support in the October contract (in relation to the December) could result in a test of the recent high.
Noncommercial activity is also a concern. Market volatility has steadily climbed to its current reading of 11.6%. As a general rule, large noncommercial traders don't like increased market volatility as it increases their risk exposure. Therefore, higher volatility readings tend to lead to noncommercial long-liquidation that ultimately drives the futures market down.
The most recent weekly CFTC Commitments of Traders report (positions as of Tuesday, July 8) showed noncommercial interests holding long futures of 151,855 contracts. While still substantial, and dangerous to a market threatening a bearish turn, it is down from its peak of 176,350 contracts from the week of March 31, 2014.