This week has not been a positive week for new-crop canola futures as concerns surrounding the record-sized soybean crop in South America along with prospects of a rebound in the 2013/14 United States soybean production weighing on the market.
Weak technical signals are seen on the attached daily chart. Technical weakness began to surface on Monday's trade. First of all, Monday's open was $5/mt higher than Friday's close, with Monday's trade taking place over a $10/mt range and closing just above the low of the day's trading range for a loss of $1.80/mt on the session. Monday's session saw prices move and close below November's 20-day moving average, as indicated by the pink line on the chart.
Tuesday's trade saw the close of the day being $2.80/mt lower, although the supportive factor Tuesday was the fact that prices bounced off of the November contract's 38.2% retracement line at a price of $554.80/mt. This represents the 38.2% retracement of the rally from the December low of $518/mt to the February high of $577.60/mt.
Wednesday's open at $555/mt remained above the 38.2% retracement level, although this support did not hold, giving way to a move lower. Prices also passed through the support of the contract's 50-day moving average, at $554, as seen by the dark green line on the chart. While prices did retrace late-session, the close of the day was below this moving average.
One encouraging sign in today's trade was support found at the upward-sloping trend line drawn from the December low of $518/mt. This support is found at $552/mt. While today's low was $551/mt, slightly below the trend line, prices did retrace to close above it. Shorter duration intra-day charts show prices hovering around this support level over a lengthy period this morning.
Should prices push below the trend line support, watch for a further move to test the 50% retracement of the same uptrend, which is at $547.80/mt. To help bolster support for prices at this level is also the convergence of the 100-day and the 200-day moving averages (light green and blue lines) at roughly the $547/mt level.
Also of significance are the weekly stochastic momentum indicators (not shown), which turned lower earlier this month, just prior to reaching the upper over-bought region, reflecting a change in momentum to the downside.
Futures spreads, used to determine the market's view of canola fundamentals, are indicating a weakening in the new crop November 2013/January 2014 spread, as seen on the lower study. This spread reached a high of $5.20/mt last July (November trading at a $5.20/t premium to the January), with a more recent January high of $4.20/mt. Currently this spread is $1.50/mt and trending lower, indicating an easing of the fundamental bullishness that has impacted commercial trader's actions in the market.
Perhaps a positive sign is the aggressive new-crop basis across the prairies. My average basis calculation is a historically narrow $15.13/mt under the November for October delivery, which has narrowed gradually over the past four weeks. This basis has narrowed more than $2/mt since January.
ICE Canada's open interest for November canola puts is highest at the $520 strike price, which closed at $10.80/mt in today's trade. The next highest open interest is at the $530/mt strike, currently at 900 contracts, which closed at $13.90/mt. The next most active strike is at a strike price of $540/mt, which closed at a $17.70/mt premium and has open interest of 851 contracts. One may consider a long-put strategy as a means of protecting oneself from a further move lower.
Cliff Jamieson can be reached at email@example.com
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