Canada Markets

Wheat Markets' Bullish Signal Short-Lived

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The September Minneapolis trade came to life on Thursday with the downing of a Malaysian airliner. Thursday's trading range took place over a 27 1/2 cents trading range creating a bullish outside trading bar, encompassing the range of trade seen over the previous five sessions. Friday's trade saw prices correct lower. (DTN graphic by Scott R Kemper)

We've lately talked about the oversold nature of the wheat markets, as seen in the lower study of the attached chart. Both daily and weekly charts across all three classes of wheat remain deeply oversold, with momentum indicators below 20%. This creates a situation where market direction can change quickly, often lead by the nervous short-covering by investors.

While investors were reported to be holding a net-long position of 8,057 contracts of spring wheat as of July 15, as reported by the CFTC, investors held a net-short position of Chicago SRW of 42,704 contracts which was the largest net-short position held since early February of this year. A sudden move in this market could lead all wheat prices higher as investors cover these short positions, which is exactly what happened Thursday.

The downing of a Malaysian airliner with 298 people on board over Ukraine was the catalyst required to lift the wheat markets. According to the latest USDA report, Russia is expected to export 19.5 million metric tonnes of wheat in 2014/15 while Ukraine is expected to ship an additional 9 mmt. The total for the crop year of 28.5 mmt of exports from this region accounts for not only 18.8% of the total global exports forecasted for 2014/15, but also represent some of the cheaper supplies available.

While it's early to determine just who is responsible for the crime and how the world will react, investors generated the buying interest on Thursday to move the September spring wheat contract 9 cents higher. This is evident in the lower study, with the Sept/Dec spread (black line) remaining unchanged at minus 11 cents (December trading over the September) from Wednesday through Thursday's trade, a sign that commercial traders remained neutral through Thursday's session while the non-commercials or investors were spooked into placing buy orders.

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As seen on the attached chart, September spring wheat traded over a wide 27 1/2 cents trading range as the news hit the market, with the close nearly at the mid-point of the range. The resulting trading bar is referred to as an outside day, with trade not only encompassing Thursday's trading range but also encompassing the trading range of the previous five days.

This can be viewed as a bullish sign and signal a change in direction for the market, although one caveat is that a close near the top of Thursday's range would have been a much stronger indicator of a change in trend as opposed to the close in the centre of the range. Friday's trade proved the situation in Ukraine did not escalate as perhaps expected, with the market giving up just more than two-thirds of Thursday's gains.

Should this event fail to generate further buying interest moving forward, key support lies at the contract's January low of $6.12 1/2/bu., just 11 3/4 cents below Thursday's low.

One thing to watch is the narrowing spreads, as indicated in the lower study of the attached chart. The Sept/Dec spread has narrowed 2 1/4 cents since July 11 while the Dec/March spread has narrowed 4 cents in the same time period. This is indicating a less bullish outlook held by commercial traders and comes at a time when global wheat fundamentals are painting a bearish picture. This bears watching.


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Cliff Jamieson can be reached at cliff.jamieson@dtn.com

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