Canada Markets

While there are a number of factors lending support to the canola market, such as Canadian dollar weakness, a lack of producer deliveries and uncertainty about the potential for this year's crop, a number of factors point towards a further move lower.

Canola's price action has shown uncertainty in the past two days, with the November contract ending unchanged Wednesday while soybeans and soybean oil finished lower, while on Thursday, canola finished lower along with soybean oil while ignoring a rally in soybeans. The soybean oil market has been in a greater than three-year down-trend and continues to seek a bottom, not the best of influences for the high-oil content canola price.

The November remains above its July 22 low of $429.10/mt, although the most recent session saw an intra-day low of $430/mt and is dangerously close to a test of this support. As indicated on the attached chart, this week's trading range has exceeded the higher and lower limits of last week's trade, while is poised to end the week with a bearish outside trading bar, with this week's close below last week's close, which seems highly likely at this time.

One confirmation of this is seen in the middle study of canola volume. Given that the weekly outside bar is being generated on a week of higher volume, which is the highest seen since the week of April 21, this increases the reliability of the bearish indicator.

The first study indicates that stochastic momentum indicators on the continuous weekly chart are oversold (below 20%) although continue to trend lower which may allow for additional downside.

The lower study would suggest that the commercial trade remains bearish, with the trend in the Nov/Jan and the Jan/Mar spread being lower (increasing carry) which suggests an overall lack of concern surrounding supplies in the upcoming months.

One last consideration is the seasonal pattern seen in canola. DTN's five-year seasonal chart (not shown) would indicate that the front-month contract, in this case the November, tends to fall roughly 6% from the end of August until the end of September, the seasonal low for the year.

Given a break below support at $429.10, where does the next level of support exist? The first level is $422.60/mt, the lower limit of a $2/mt gap in trade seen in the March contract in late February/early March. Given that canola has traded over a $19.90/mt range over the past four weeks ($429.10 low to $449/mt high), a break below this channel could also see a move of $19.90/mt to the downside, which is equal to the width of the original channel. This would result in a low of $409.20, which is consistent with the $409/mt weekly low reached the week of February 24, which could also add to the support at this level.

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

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

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