Grains Dissected Ahead of WASDE
The spot contract has been in consolidation mode the last couple weeks, setting the stage for a breakout in conjunction with the January WASDE on Jan. 10. It is no coincidence the VPOC, or volume point of control, is $3.87 3/4, which is the price March futures have been oscillating around since mid-December. The VPOC is the level at which the most volume has changed hands and also acts as a magnet for price action. Since consolidating, however, momentum indicators have slowed, putting in lower highs as price has moved sideways. This would tip directional scales lower unless last week's highs of $3.92 can be overcome. The $3.92 level is also noteworthy, as the March contract touched that value three times last week, putting in a triple top. The old trading adage is that triple tops and triple bottoms never hold, so it would not be unusual to see a retest of that level if USDA reports warrant a rally. Encouragingly, March futures held the 50- and 100-day moving averages several times last week, including Friday. Major moving averages are important to algorithmic trading programs and managed trend-following programs alike. Additional short-term weakness would not surprise but we would prefer to stake longer-term directional bias until after USDA and the market has shown their hand this week.
Unlike March corn, March soybeans have not been in a consolidative pattern but instead have been enjoying a sharp rally off the November lows. The rally felt like it came to an end on Friday with the heavy losses following Thursday's near doji close. The fact price almost put in a doji at the end of such an impressive rally is a bit concerning as it shows indecision by the trade at the rally continuing. The sell-off Friday also saw momentum indicators turn sharply lower as would be expected. One lower close does not end a trend, however, and Friday's price action did not do that either. From a short-term, hourly perspective, price action did drop below the Dec. 27 corrective low at $9.38 1/2, but the straight up nature of the rally left very few corrective lows in its wake. We would expect price to get sticky around the 38.2% retracement of the $8.82 1/2 to $9.61 rally at $9.31 if the weakness continues. March soybeans have a very clear path forward with strength back above Thursday's high at $9.61 to move back to a full bullish stance. Otherwise, short-term scales remain down with support expected about a dime lower.
March Chicago Wheat:
The trend in Chicago wheat futures dating back to early September is one of the more impressive technical features in ag markets. While corrections have occurred along the way, only once has there been a lower low in mid-November. This said, it is difficult to dismiss the proximity to the upper range cap at the June highs. In addition, as futures made new highs in late November, again in mid-December and once again last week, momentum indicators such as stochastics made lower highs each time. This is a textbook definition of a bearish divergence between momentum and price. We would consider this a red flag about a looming price correction in March futures. However, until or unless March futures break a meaningful corrective low like that from Dec. 23 at $5.38 3/4, the trend must still be considered up. The distance from major moving averages at $5.11 to $5.29 and spot prices at $5.53 illustrates how strong the trend has been. The VPOC for March futures sits below at $5.28, almost exactly matching the 50-day moving average at $5.29. On a corrective set back, and assuming we break the corrective low from Dec. 23, we would expect that level to act as intermediate term support.
Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grains and grain futures involve substantial risk and are not suitable for everyone.
Tregg Cronin can be reached at email@example.com
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