Technically Speaking

Weather forecasts will move front and center in the grain markets this week, and none more so than new-crop HRW wheat. Much of the Southern Plains growing area missed out on precipitation this past week, and now faces severe weather warnings Monday. After this storm system moves through overnight temperatures are forecast to plummet well below freezing over much of the western portion of the region, extending as far south as the Texas Panhandle. From a fundamental point of view, this could be the final nail in the coffin of a crop that has been on life support since planting season last fall.

I'll save further discussion of weather and fundamentals for DTN's Senior Ag Meteorologist Bryce Anderson and DTN Contributing Analyst Joel Karlin in their respective blogs. Given this is called "Technically Speaking", let's take a look at some chart signals that are indicating the growing concern over weather.

First and foremost, take a look at the weekly chart for the July Kansas City wheat contract (top chart). Notice that last week's action took the contract below the previous low of $7.28 1/2 (week of March 25), only to see the contract come storming back to close back above this level Friday. At first glance, this appears to be a normal head-fake the wheat market is so famous for (a head-fake is when the contract spikes above or below the previous high or low, indicating an extended move in that direction, only to quickly reverse back the other way).

Secondly, weekly stochastics (second study) are showing a bullish crossover (the faster moving blue line crossing above the slower moving red line, with both below the oversold level of 20%) indicating a move to an uptrend. Notice that this would finally offset the bearish crossover seen in conjunction with the establishment of the high of $9.44 the week of November 5, 2012. Those looking closely at the chart will notice the contract did a topside head-fake three weeks after this high before moving to a sharp downtrend.

Interestingly though, from a fundamental point of view, the new-crop futures spreads (bottom study) continue to show a neutral to bearish commercial outlook for supply and demand. The July to September spread (green line) has stabilized at the 11 1/2 cent carry level, meaning the trend could soon turn up reflecting a weakening carry (more bullish outlook). Likewise, the July to December spread (purple line) is also holding above its previous low of a 30 1/2 cent carry. A move above the 26 3/4 cent carry level would also indicate a move to a possible uptrend by this spread.

Volatility (third study, red line) has crept up recently and is just below 18%. While still well below the high of 32.4% seen last summer it may still be high enough to limit noncommercial buying interest. However, the recent increase can be tied to growing concern about the weather, as short-supply weather markets tend to see sharp gains in volatility.

Taken in total, July KC wheat weekly technical studies are showing the contract could move into a contra-seasonal uptrend. Initial resistance is pegged near $8.00, a price that marks the 33% retracement level of the previously mentioned downtrend from $9.44 through the low of $7.28 1/2 (not counting the bottom head-fake). If the commercial outlook does indeed grow more bullish, a move to the 50% retracement level near $8.36 is possible.

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