Technically Speaking

HRW Wheat's Bullish Reversal

Source: DTN ProphetX

Looking for bullish technical signals at the end of last week was similar to trying to find a needle in a haystack, with most commodity markets seeing numerous bearish signs due to increased noncommercial (investment) selling. However, if you dug through the pile far enough, you might have stumbled upon the September Kansas City wheat contract.

HRW wheat is in the throes of what is expected to be a disappointing harvest, with combines moving into southern Kansas this past week. Historically, wheat would see increased pressure as harvest progressed on the idea more cash supplies would be made available by immediate sales. The past few years have seen a change in market behavior though, with the five-year seasonal index (not shown) now reflecting a tendency for the market to rally starting in early July, posting its high weekly close (on average) at the end of the fourth week of August.

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A look at last week's action on the weekly chart for the September contract (most active) shows the market may have established an earlier than normal seasonal low. Since the beginning of the 2013-2014 marketing year (starting the week of June 3, 2013) the September contract has posted weekly closes of $7.42 3/4, $7.15 1/2, and $7.36. And while last week's settlement has not set a new high for the marketing year, it was what occurred over the balance of the week that indicates a possible bullish change.

Last week saw the September Kansas City contract traded below the previous week's low of $7.12 3/4, posting a new low of $7.10 1/2. However, it also traded above the previous week's high of $7.44 before settling higher for the week on Friday. Those familiar with this blog will recognize this as a simple bullish key reversal, possibly indicating a change in sentiment toward the contract.

Along with the bullish technical signal on the price chart, weekly stochastics (bottom study) continue to hold near the oversold level of 20% with the last major crossover (occurring below 20% or above 80%) bullish (below 20%) during the week of March 11, 2013. This would imply a chance for market momentum to start to grow more bullish as well.

Finally there are the fundamentals to consider. While the July to September spread has moved into an inverse (not shown) indicating an increasing bullish commercial short-term outlook, the September to December futures spread (middle study, green line) has seen its carry whittled to about 14 cents. This continues to represent a neutral to bearish longer-term commercial outlook that could limit the rally in the futures market.

The seasonal index shows HRW tends to rally about 9% (weekly close only) over the course of the last two months of the summer. Using this year's numbers, that would project a high weekly close between $7.75 and $7.80. It could also be projected then that the September futures contract could, at some point, test technical price resistance at $7.89 but struggle to move much higher. This level represents the 33% retracement level of the previous downtrend from the high of $9.46 3/4 through last week's low. Also recall that a market structure consisting of a neutral to bullish trend (weak uptrend) combined with a neutral to bearish commercial outlook (futures spread) usually see retracement rallies limited to 33% to 50% of the previous move.

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Chris Grotegut
6/27/2013 | 1:24 PM CDT
The Texas panhandle is set to experience a major shortage of wheat seed. A majority of grain kept for seed has a lower than normal test weight which can significantly reduce yield potential for 2014 crop. Drought impact is severe. Across the region, approximately 95% of acres lost or not worth harvesting. Projected 106 F this afternoon SW of Amarillo by NWS out of Amarillo. Is corn crop next?