Canada Markets

New-Crop Canola at a Crossroads?

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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After reaching a double bottom in February of $431.50/mt, November canola has posted an 11.3% rise to Friday's close of $480.20/mt. Recent trade could be viewed as forming an ascending triangle pattern, bound by the rising blue trend line and the horizontal red line which represents the 38.2% retracement of the move from the contract high to the February low. Momentum is trending cautiously higher (second study), while the lower study indicates a neutral stance on the part of commercial traders. (DTN graphic)

Despite the expectation for a huge carryout of canola this crop year and increased canola acres in 2014 (8.5% increase according to AAFC), the November canola contract continues to knock on the door of chart resistance while perhaps indicating a bullish ascending triangle chart pattern in recent trade.

As seen on the attached chart, trade over the past two weeks has seen higher lows, as indicated by the upward sloping blue trendline, while trade is confined below the flat upper line of resistance, which happens to be the red line, which is the 38.2% retracement of the move from the contract high at $577 to the February low of $431.50/mt. Textbooks on technical analysis would suggest this to be a bullish pattern, with a breakout from the pattern taking place to the upside, "more often than not."

A move to the upside would first test a recent weekly high of $493.90/mt, on the way to $504.30/mt, which is the 50% retracement of the already mentioned downtrend. The measuring implications for a breakout from this pattern would suggest that price will move higher by the same amount as the distance at the triangle's widest point. The March 24 distance from the lowest point to the red line is $22.10/mt, which would suggest the upside target would be this same distance above the horizontal resistance line, or $22.10/mt + $487.10/mt = $509.20/mt.

The middle study represents the stochastic momentum indicators, which indicate a gentle uptrend in momentum since March 24. The third study is the Nov/Jan spread, which represents the sentiments of the commercial trade. Given the sideways trend in the spread since mid-February, one could say that the commercial trade is bearish given the carry involved (January trading over the November by $7.30/mt), although their sentiments have remained neutral, which perhaps weakens the theory for further upside potential.

Despite the neutral sentiment shown by the commercial trade, basis for new crop was shown to have narrowed at many locations in Friday's look at available Internet quotes. The average prairie-wide basis remains very wide at an average of $55.25/mt under the November, although this basis was recorded as wide as $57.99 in late February.

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