Canada Markets

Hard Red Spring Wheat Struggles to Confirm an Uptrend

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The weekly chart for the hard red spring contract broke above trend line resistance in today's session, reaching a four-week high, before retracing to close near session lows and below Friday's close. Stochastic indicators in the second study continue to show upward momentum, after seeing a bullish cross-over while deep in over-sold territory. The third study indicates the HRS/HRW spread weakening to minus 10 3/4 cents. (DTN graphic by Nick Scalise)

Today's USDA Quarterly Stocks report was encouraging for wheat overall, with Sept. 1 first quarter stocks of 1.855 billion bushels, below the average trade expectation of 1.913 bb and 11.8% below the 2012 September 1 stocks of 2.104 bb.

The Annual Small Grains Summary report showed overall wheat production for 2013/14 to be 2.13 bb, slightly above the average trade estimate of 2.108 bb, above the September estimate of 2.114 bb and 6% below the estimated production in 2012/13 of 2.269 bb. By class, hard red winter wheat production is estimated to be 44 mb below the trade estimate of 788 mb, soft red winter production is estimated to be 21 mb above the average trade expectation of 544 mb, spring wheat is estimated to be 20 mb above the average trade expectation of 512 mb and durum production is estimated to be 1.5 mb above the 60 mb average trade estimate.

As seen on the attached chart of the December weekly HRS contract, HRS wheat pushed above trendline resistance in today's trade that has been in place since the week of Nov. 26 when the weekly high reached $9.59 1/2/bu.

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Has this long-term trend in fact reversed? Traders will consider various means to confirm a reversal in trend, with one such method outlined in John Murphy's book Technical Analysis of the Futures Markets referred to as the four-week rule, where a change in a down-trend is identified or confirmed when prices exceed the high of the previous four weeks, which in turn signals a buying opportunity.

Both the SRW and HRW wheat contracts saw prices exceed their four-week highs on Sept. 26 and have continued to hold above these levels since. Spring wheat, on the other hand, is facing a larger challenge in confirming this reversal in downtrend. Today's trade saw prices exceed the previous four-week high of $7.40/bu in early trade when a high of $7.42/bu was reached, although the close was technically weak, closer to session lows at $7.28 1/2/bu, which is down 2 3/4 cents from Friday's close and below the resistance level of the downward-sloping trendline.

The middle study shows a recent bullish cross-over of stochastic indicators while deep in over-sold territory (below 20 on the chart). Once again, the longevity of this momentum could be confirmed with a sustained close over $7.40/bu.

The last study shows the HRS/HRW spread, which shows a rare negative 10 3/4 cent spread (HRW trading over HRS). It appears that this spread has not traded in this fashion since September 2007 and is influenced by the large supplies of low-protein spring wheat in North America.

One last factor to consider is the decline in the noncommercial net-short position for HRS wheat (not shown). Investors are becoming increasingly wary of their short-positions in wheat given the positive demand faced in the U.S. in the first quarter of this crop year. In early August, investors held a net-short position of 5,262 contracts of HRS wheat, which was the largest net-short position held since April of 2005. Since then, investors have trimmed their bearish net-short positions in six of seven weeks, leaving the most recently reported net-short position as of Sept. 24 at 1,706 contracts.

While this wheat market may not be a runaway bull market, it is becoming less bearish. Continued positive momentum may prove enough to see continued buying from the investor crowd as they reduce their risk, while adding additional support to the spring wheat market.

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

(ES)

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