Canada Markets

May Canola Tests the lower Bounds of a Continuation Pattern

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The May canola future reached its lowest level in 10 sessions, while momentum indicators on the first study is signaling a potential change in direction. Noncommercial traders appear in charge, with the histogram bars on the middle study signaling this group adding to their bearish net-short positions over the past three weeks while the lower study shows the May-over-July spread narrowing to a more neutral $6.30/mt. (DTN ProphetX chart)

Over the past two weeks, the May canola contract has failed at the 38.2% retracement of the move from the contract's recent January high to February low, calculated at $471.50/metric ton. This level has also acted as resistance during this week's trade, after reaching a high of $471.60/mt.

Since reaching a recent low of $457.70/mt on Feb.3, the daily chart points to the formation of a bullish flag or consolidation period, as indicated by the blue parallel lines on the chart. A bullish breakout would require a move above $473/mt, the upper-end of the pattern, while a break to the downside below $466.20/mt would signal a bearish turn. Thursday's low tested the lower-end of the pattern, while the first study points to the stochastic momentum indicators crossing and potentially roiling over, signaling the potential of a bearish move ahead.

Noncommercial traders seem in control of this move. As seen with the blue histogram bars on the middle study, this group has increased their bearish net-short position for the third straight week to the largest bearish position held in nine weeks at a net-short of 67,414 contracts as of Feb. 11, a position that will likely show an increase when Feb. 18 data is released.

The lower-study on the attached chart shows the May/July futures spread narrowing $0.40/mt on Thursday to minus $6.30/mt (July trading over the May contract, a sign of supportive commercial activity and something that bears watching. Over the course of the three days of this week, this spread has remained unchanged, while has strengthened or narrowed to minus $7.10/mt since Feb.10. This reflects a neutral 55% of full commercial carry, having improved from 60% of full carry since late January.

Despite the current rail delays linked to blockages, along with a lack of progress on Canada-China trade issues, the February AAFC supply and demand estimates point to a 300,000 mt lower carryout at 3.2 mmt than reported in January. Concerns also linger over the significant area to be harvested in spring.


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