Technically Speaking

Kansas City Wheat: Double Top or Fakeout?

Dana Mantini
By  Dana Mantini , Senior Market Analyst
A daily chart of Kansas City May wheat futures shows a potential double top and bearish moving average crossover.

Kansas City May Wheat:

Kansas City May wheat has plunged as much as 84 cents per bushel since the Feb. 24 high at $6.64. The chart appears to have a double-top chart formation as the high in January was also $6.63. A combination of weaker European and Black Sea wheat values, heavy rains and snow in previously dry hard red winter wheat areas, and a lagging pace of hard red winter wheat exports, have pressured futures.

Another bearish indicator for KC May would be the recent crossover of the shorter-term, 20-day moving average through the longer term 50-day average, typically a bearish trend change indicator. KC May is also trading below the 100-day moving average, typically bearish. However, the market is very oversold. Longer-term weather forecasts project a return to a drier pattern into the summer.

KC May is trading just above what should be a major support area of $5.70 to $5.80, where wheat futures should find solid buying. Providing underlying support for wheat should be the still bullish supply and demand outlooks for both corn and soybean futures.

My feeling is that despite the bearish technical indicators, this could be a bearish fakeout for this market. Without the collapse of both corn and soybean markets, I find it difficult to see KC wheat futures breaking down much from here, at least in the short run. The prospect for increasing the use of wheat in feed rations in the Southern Plains looks to be escalating. Dryness in the Northern Plains wheat areas could also send planting estimates down in favor of corn and soybeans.

July Corn Futures:

July corn futures appear to be coiling in an ascending triangle chart pattern, suggesting a breakout either way might project the next corn futures move.

A rally above and solid close above the $5.50 to $5.55 area is likely to send July corn to new highs and possibly a new leg higher, while a break and close under $5.20 would be a bearish sign for July corn. Fundamentals would seem to favor an upside resolution to the triangle pattern, with China having bought close to 150 million bushels (mb) of U.S. corn last week and ending stocks on corn appear headed to 1.2 billion bushels (bb) or lower.

Also providing underlying support for corn futures is the resurgent ethanol market, which saw a 12-week high in production last week. As economies and cities begin to open following the COVID-19 lockdowns, ethanol usage should continue to improve.

July Soybeans:

Much like July corn futures, July beans also have a similar chart pattern --- an ascending triangle chart pattern that is often a continuation pattern in a bullish trend. A rally and close above the $14.30 to $14.40 area would likely lead to another leg higher in the soybean market. A fall below $13.50 on a closing basis would likely negate the bullishness of such a pattern.

Also, as in corn, the soybean fundamentals are also bullish, with export sales currently 99% of the USDA projection with 5 1/2 months left in the crop year. Both domestic end users and exporters will need to ration demand as we go forward or risk falling below a pipeline supply.

It is likely any resolution to the triangle breakout in both corn and soybeans will be closely tied to South American weather over the next few months, as well as the upcoming March 31 stocks and seeding report.

Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grain and soybean futures involve substantial risk and are not suitable for everyone.

Dana Mantini can be reached at: dana.mantini@dtn.com

Follow Dana on Twitter @mantini_r

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