Technically Speaking

As hard as it is to believe, at different times this past week it seemed like the September Chicago wheat contract wanted to establish an uptrend. I know, in my latest On the Market column I dismissed wheat's chances of turn bullish rather easily, with the lone bullish factor in the market's bearish haystack being the fact it is technically oversold. But perhaps in its weakness lies its inherent strength.

Or something like that. It is far too late on a Friday afternoon to be philosophical.

It doesn't take much to see that September Chicago's weekly stochastics (second chart) are about as close to 0% as can be, with the faster moving blue line finishing the week at 3.8% and the slower moving red line at 5.7%. Like a putt hanging on the lip of the cup and not falling, it wouldn’t have taken much of a rally for weekly stochastics to establish a bullish crossover.

But it wasn't to be. Instead of holding steady near Thursday's solid close the contract (heck the wheat market in general) fell hard Friday as the idea of a downed Malaysia Airlines plane in Ukraine leading to increased demand for U.S. supplies fizzled. This allowed the September contract to fall back to near its low of $5.24 1/4 posted earlier in the week.

Pressure continues to come from both sides of the market. Commercial selling is indicated by the strengthening carry in the September to December futures spread (third chart). The 24 cents the spread showed at Friday's close is the strongest the carry has been since it became relevant, meaning the commercial view of supply and demand continues to grow more bearish.

The other side of the market, the noncommercial side (blue histogram, bottom chart), also sold this last week. Friday's CFTC Commitments of Traders report (positions as of Tuesday, July 15) showed this group increasing their net-short futures position by 3,054 contracts to 43,704 contracts. This is the largest net-short position (by noncommercial traders) since the week of February 3, 2014.

Where to now for Chicago wheat? For that we need to turn to its long-term monthly chart. The nearby September contract is in the middle of an old block of trading between $5.85 and $4.25 established between September 2009 and June 2010. Meanwhile, monthly stochastics are approaching the oversold level of 20%. Unlike the weekly study, the long-term momentum indicator already established a bullish crossover (faster moving blue line crossing above the slower moving red line below the 20% level) at the end of February 2014. Therefore, this sell-off doesn't need to dip back below 20% before a confirming crossover is seen.

Given that the September contract is priced in the lower 18% of the market's 5-year distribution range, a round of noncommercial short-covering buying could occur at any time. However, until the commercial side starts to grow more bullish potential rallies should be limited.