Canada Markets

With the March contract for canola closing at $112.50/mt on Jan. 25, two technical resistance levels lay ahead in close reach. One was the 50% retracement level of the downtrend from the September high of $657.50/mt and the December low of $568.40/mt at $613/mt. The other was the 61.8% retracement of the same downtrend, at $623.50/mt.

The $613/mt resistance was breached in Monday's trade earlier this week, while today's trade sailed through the $623.50/mt resistance level. The market has not seen these levels since late September. Two daily highs may act as resistance should the March contract continue this short-term trend on upward. The first is at $637.60/mt, the Sept. 20 high, while the next is $640.40/mt, the Sept. 19 high.

So where to next? The sharp rally over the past two weeks almost hints of a parabolic rise, leaving one to question how long this can continue. There are technical signs, however, indicating that this canola rally can continue.

First of all, this is the season of canola's seasonal strength. The five-year seasonal index would indicate that canola prices have moved an average of 4% higher during the first two weeks of February. Over the last five years, prices have then tended to fall into the month of March, before beginning yet another trend higher to reach canola's annual high in June. January's trade indicates that canola is tracking its five-year index to this point in time.

Technical strength is also indicated by the fact that today's daily, weekly and monthly closes are near the top of their respective trading ranges. The monthly chart indicates today's close at a four-month high.

Although difficult to see, the second study of the attached chart indicates that stochastic momentum indicators are in over-bought territory (above 80) although are continuing to trend higher. The two indicators are trending upward, while parallel to each other and showing no sign of turning lower. A change in momentum will be signaled by a bearish crossover of these two indicators, with the faster moving blue line crossing through the slower red line from above. We will have to continue to watch for this sign.

A new indicator I'm playing with is the Average Directional Index (ADX) as shown in the lower study. When combined with other indicators, this can be used to generate buy or sell signals. On its own, the ADX is simply an indication of the strength of a trend. There is extensive math behind the determination of this indicator, but in a nutshell, readings below 20 indicate a weak trend, while readings above 40 indicate a strong trend. This does not refer to an upward trend or downtrend, but only refers to the fact that a trend exists.

When the indicator line crosses above 20 from below, which is the case in this situation on Jan. 28, an end of a trading range is signaled along with the start of a new trend. Today's reading was 24.37, which is still a long ways from the level of 40 that signifies a strong trend. A change in trend is just the reverse, or a movement from above the 40 line to some level below 40.

While we have had constant reminders of the tight fundamental situation surrounding the canola crop, it is encouraging to finally see technical signals catching up to the fundamentals.

It is important to note that Martin Pring, in his book Technical Analysis Explained, suggests that "all indicators can and will fail."

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

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