New-Crop Minneapolis Wheat: Overextended or Not?
MINNEAPOLIS SEPTEMBER FUTURES:
While nothing has changed regarding trader concerns over expanding drought in the Northern Plains and southern Canadian Prairies spring wheat areas, futures have been on a parabolic rise, with Minneapolis September now up nearly $1.97 in this calendar year. Granted, the drought has not subsided, with North Dakota perhaps in the worst shape, but weather markets can be awful fickle. We have seen it time and time again when a market gets overextended and there will be a sudden correction, for no reason at all. As in corn and soybeans, the Minneapolis wheat move is like a freight train -- stand in front of it and you're likely to get run over. However, there is really no shortage of wheat in the world and Russian, Ukraine and even French new-crop wheats (85% good to excellent) are in solid shape.
The Minneapolis September futures chart currently features a relative strength index (RSI) at over 75%. The RSI is an oscillator that moves between two extremes -- 0 and 100. Typically, 70% or above signals a market which is overbought and possibly due for a pullback or correction; a reading under 30% signals the opposite -- oversold. The only problem when relying on such an indicator is a market can remain overbought or oversold for days. Likewise, the slow stochastics momentum indicator suggests a market is overbought when above 80 and oversold when under 20. Minneapolis September reads over 97% to begin this week.
As with the RSI, the slow stochastic indicator can simply be a warning that a pullback could be near. With corn and soybeans also on a parabolic rise, it is tough to imagine anyone wanting to stand in front of all three freight trains. But these markets are all susceptible to a quick and violent correction at any time. In the meantime, the bulls are still in control. Only time will tell if these momentum readings are high enough to stop the train, at least for a short time.
JULY CORN FUTURES:
The fundamentals for corn remain unmistakably bullish -- tightening stocks in the U.S. on solid demand and expanding drought, which is plaguing the winter corn areas of Brazil, and threatening to cut Brazil's total corn crop sharply from the current WASDE estimate of 109 million metric tons (mmt) (4.3 billion bushels) -- record large. While the jury is still out on Brazil's May weather and production prospects, private analysts continue to paint a wildly bullish picture of falling production, as torrid China demand shows little sign of waning.
As in the Minneapolis wheat futures chart, July corn futures are on a meteoric rise, having moved over $3.00 per bushel higher in less than eight months -- $1.40 higher in just the month of April alone. The above-mentioned RSI and slow stochastics indicators early on Monday are at an elevated 78% and nearly 97%, respectively. Once again, there is no change in weather or fundamentals; but a futures market is known for pricing in future losses in a bull market. Just be aware that a correction will occur, but the timing of that correction is the big unknown.
JULY PALM OIL FUTURES:
If there is one market that may have already begun a correction it might be the July Malaysian palm oil futures contract. After rising to yet another new contract high last Thursday and reaching those overbought momentum levels we have talked about, all of a sudden palm oil plunged on Friday and Monday, perhaps the start of a much larger correction. Little has changed in the overall tightness of world veg oil supplies, but perhaps the record rise in COVID-19 cases in India is causing some concern for world economies, and hence demand for both food usage and fuel usage of oils. India is the world's largest importer of vegetable oils. July palm oil has risen over 62% just since October, and May typically features increased production levels. While the long-standing bull market may not be over just yet, perhaps a further correction is in the cards before the resumption of higher values.
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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