After posting a low of $4.88 following the release of USDA's November Supply and Demand report this past Tuesday, December Chicago wheat spent the next two days posting a modest rally back to $5.00 on continued commercial buying interest. However, the pattern it left on its daily chart looks to be a bearish flag, confirming the idea that its minor (short-term) downtrend has not yet come to an end.
Note that this week's low was above support pegged near $4.85 3/4, a price that marks the 67% retracement level of the previous uptrend from $4.63 through the high of $5.31 1/2. More importantly, daily stochastics (short-term momentum study, middle chart) show the contract rallied before moving into an oversold situation below 20%. Normally this is an indication of a consolidation phase, such as a bear flag, resulting in a resumption of the previous downtrend.
It should also be noted that daily trade volume (the number of contracts changing hands, bottom study) decreased during the Wednesday-Thursday rally. Monday's session saw Dec Chicago wheat post trade volume of 131,560 contracts followed by 133,293 contracts Tuesday. Wednesday's 4-cent rally was on trade volume of 83,843 contracts, with Thursday's 3 3/4 cent gain tied to volume of only 87,359 contracts. Decreasing volume in a consolidation phase of a larger trend, in this case down, signals little to no new buying interest, leaving the door open to another wave of selling.
The old adage is "flags and pennants fly at half-mast", meaning the trend before the consolidation pattern should be duplicated when the market resumes its trend. In this case, the secondary downtrend began with a move below $5.06 and continued to the low of $4.88 or a range of 18 cents. The consolidation pattern saw consecutive lows of $4.88, $4.90, and $4.92 1/2 putting Friday's breakout point at approximately $4.94 (the contract has fallen to a low of $4.91 1/4). Using the $4.94 breakout, and subtracting the previous range of 18 cents, puts the downside target near $4.76.
Though this target is below the previously discussed support mark near $4.85 3/4,it should be enough of a sell-off to pull daily stochasticsunder the oversold level of 20%, setting the stage for a bullish crossover signaling the next move to a minor uptrend.
To track my thoughts on the markets throughout the day, follow me on Twitter:www.twitter.com\Darin Newsom