Canada Markets

Dec Spring Wheat Fakes Higher, Breaks out Lower

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The December MGEX spring wheat contract broke higher from a continuation pattern on May 22 to reach its highest level in nine months, only to post a bearish outside-day bar on May 29 and breakout lower from the same pattern. The Dec/March spread has weakened this week (middle study), while the lower study points to downward momentum with further downside possible. (DTN graphic by ProphetX)

Not long ago we looked at the July MGEX spring wheat chart, which broke out higher from a triangle pattern on May 18, along with the measuring techniques used for this move based on technical analysis theory.

The December contract made a similar move two sessions later on May 22, while four trading sessions later reached its highest level in nine months of $6.60 1/2 per bushel on May 29, following the three-day weekend in the United States. The move failed to sustain itself, with a bearish outside-day reversal bar formed on the daily chart. At the same time, the weekly chart is also flashing a bearish outside-week trading bar (not shown), trading both higher and lower than last week's range while ending the week not only lower, but 1/4 cent from the lowest point of the 37 1/4-cent range traded this week.

The measuring technique for the breakout from the triangle pattern shown would suggest that the move from the breakout point on May 30 could continue to the extent of the distance of the base of the triangle, which is the vertical distance calculated on April 4 when this pattern began, which is calculated at 53 1/2 cents. When this same value is subtracted from the most recent May 30 breakout at $6.30/bu., the target becomes $5.76 1/2/bu. ($6.30-$.535), which would suggest a fresh contract low.

Support may be found at retracement levels from the uptrend from the April 4 low to the May 29 high. Friday's close ended below the 61.8% retracement of this move at $6.24/bu., while the 67% retracement of this move is calculated at $6.21/bu., as seen by the horizontal blue line on the attached chart, which has yet to be tested. A move breach of this level could lead to a test of the $6.19/bu. double-bottom formed on May 14/15.

The second study on the chart points to a weakening December/March spread, a sign that commercial traders are showing an increasingly bearish approach to trade. Recent rains and seeding progress at or ahead of average pace in the U.S., as well across the Prairies, are seen easing earlier concerns held by commercial traders. The spread weakened by 1 1/2 cents on Friday and 4 1/2 cents over the course of the week to minus 12 cents (March trading over the December), pointing to a growing bearish view of fundamentals. Potential support on the spread chart is seen at minus 12 3/4 cents, reached on April 23, that is the weakest level seen over the life of the spread.

The lower study, the daily stochastic momentum indicators, suggest that the market has chopped back and forth since mid-April while momentum indicators have remained largely in neutral territory. Over this period, both bullish and bearish crossovers of momentum indicators have taken place in neutral territory, suggesting that changes in direction -- both higher and lower -- have not been viewed as significantly bearish or bullish moves, which are reserved for crossovers in oversold territory below 20% and overbought territory, above 80% on the chart. The current chart suggests a further move lower is possible prior to prices reaching oversold territory.

Not shown on this chart is weekly CFTC data released Friday for positions held as of May 29. Investors or noncommercial traders increased their bullish net-long positions held across all three wheat markets. In the case of the most actively traded Chicago SRW wheat, investors are now holding the largest net-long futures position since November 2012 of 45,129 contracts. Investors in spring wheat increased their bullish net-long position by 2,520 contracts, or 51% over the past week, to 7,452 contracts, the largest bullish position held since November. Further risk remains for this market as planting progress and improving crop conditions in North America may cause this group to think twice about their bullish stance.

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

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