Technically Speaking

Sometimes one can look at a chart and it is easy to see what has happened. Take the long-term Chicago wheat monthly chart as an example. One glance and the most casual observer will see that the market is locked in a downtrend, a move that has seen the nearby contract fall below support near $5.99 1/4.

The usual driver of such a strong move is evident once again, as noncommercial traders maintain a large net-short futures position (bottom study, blue histogram). In the final CFTC report for the month of January (positions as of Tuesday, January 28), noncommercial traders reportedly held a net-short of 57,742 contracts. This despite monthly stochastics (second study) showing the market to be sharply oversold, with this momentum indicator in the low single-digits. Recall that stochastics below 20% are considered oversold and can begin to spark rounds of buying interest.

The real novelty of the Chicago wheat market is the strength of the downtrend despite signs that fundamentals are actually growing more bullish. Note that the nearby futures spread (third study, green line), in this case the March to May spread, has seen its carry whittled back to only 2 1/2 cents at the end of the month. This is the weakest the carry has been, at the close of a month, since the 3/4 cent registered back in April 2003. One doesn't have to go back as far to remember the strongest carry (most bearish close) of 49 3/4 from May 2011.

This sets up a long-term market structure that isn't seen that often. Remember, investment traders will usually, eventually, follow the fundamentals so such a strong divergence is unusual. Given the bullish commercial view and continued bearishness of noncommercial traders, Chicago wheat would be classified as a Type 7 market (using DTN's scale of 9 market types). That means those holding short-futures should do so cautiously, because investment traders (noncommercial traders) could quickly look at covering their position (buy back futures). With commercials already bullish, that could lead to a sharp rally.

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