Wheat: 'Cereal' Underperformer No More

For those that follow the grain markets, I'm sure you must be aware of Wheat's relative underperformance to corn and beans over the better part of the past 2 years. I believe this may be coming to an end, as it appears some serious buying has entered the picture and the technicals speak well to its future prospects.

The weekly chart tells a story of repetitive patterns. From '08-'10 wheat was bottoming in a wedging type pattern, making multiple nominal lows, but not breaking down. Throughout the time, positive divergences were forming in the RSI and MACD indicators. We have a similar situation occurring over the past couple of years with the look of an upside break approaching. 

We've made a very strong move this week, breaking above the tenkan-sen and kijun-sen on strong volume and the chikou span has finally been able to clear prior price congestion. Similarly, we've cleared both the 10 and 30 week MA's on volume, with a flattening 30wk. 

Potential resistance will come from kumo (cloud) just above.

The daily chart gives us a clear view of the sideways action we've put in over the past 7 months. We've spent a great deal of time in what looks to be a bottoming process. There is evidence of accumulation especially in the current calendar year. 

We've cleared the kumo this week and a bullish tenkan-sen cross will occur on any new nominal high from this point forward. A bullish MACD centerline cross is imminent and RSI has remained firmly in bullish territory, consistently holding the 38 level.

Zooming into the 4h chart, we can see the strength of the move over the past 2 days. We managed to breakout of a downchannel on heavy volume and are currently in overbought territory. A sideways consolidation would not be unexpected and a solid opportunity to enter what could be the beginning of a very strong trend.

The chart above is a daily chart of the wheat-corn spread. It has held in a fairly narrow range over the past year, but is now once again nearing the highs. These highs are far from the traditional spread between these products, where wheat has averaged a ~1.46 premium. I think we are about to revisit those levels.

Finally, we have a weekly of the soybean-wheat spread. We recently touched extreme levels here and got firmly rejected. Looking for some mean reversion to occur here.

As timeframes and risk tolerance vary for most traders, I have trouble giving exact entries, stops, etc. for this post. However, I believe there are plenty of different points for traders to be able to enter into a long trade. One could wait for a breakout of the weekly falling wedge, a break of the past year's range, or look for a bull flag/consolidation over the next few sessions to buy the dip. 

BONUS: A few quick setups in the agriculture/soft commodity space that I am very high on.

Oats are set up beautifully. We've entered an ichimoku uptrend on the daily chart as evidenced by the bullish cloud. Confluence support was found this week at the 50day MA and top of kumo. Oats have been in a 1+year downchannel and a breakout appears imminent. 

One thing to keep in mind is that trading in this product is a bit thinner than other grains.

Cocoa is attempting to break out of a 1+ year downchannel as well. The tenkan-sen has crossed above the kijun-sen and we are currently in a symmetrical triangle (not drawn). I am currently long and I believe that cocoa is in the process of bottoming here. However, we're currently on the cusp of falling back into the prior channel and the weekly close should be extremely important.

Finally, coffee, which has been beaten down severely, is in a compelling area to buy. We can see support from a 3 year uptrend line and a move towards the top rail of a falling wedge. Positive RSI/MACD histogram divergences are apparent and a bullish MACD cross is imminent. 

The daily chart is holding just below the 50d MA, along with positive RSI/MACD divergences. I'd be a buyer on a high volume move and hold of the 180 level (which we were briefly over today). 

Crude Oil (CL) Weekly Outlook/Strategy (01/15/12 - 01/20/12)

Towards the end of this week we saw an awesome intraday reversal, with a great trade to be had on Friday. The thinking is that we will be back into "sell the rips" mode from here.

Weekly: We continue to see those topping candles on increased volume each time we near channel resistance. Some divergences are now appearing on the RSI and MACD histogram. Tenkan-sen has acted as support but is now flat. A break of our uptrend line would be significant here.

The action at these levels is most definitely not what I'd consider bullish. It appears to me that we may eventually head back to the low 80's if not lower.

Daily: As I've written about previously, I believe the 97.53 area is HUGE as a pivot. From a daily perspective we neared broke our trendline, this past Friday, but bounced off our kumo and pivot area. Significant negative divergences appear on RSI/MACD, with MACD rolling over and a bearish centerline cross imminent.

Chikou has fallen below prior price and tenkan-sen is now heading lower. I will re-emphasize the importance, in my opinion, of that 97.53 area. Below you want to be bearish. Regardless, I do not believe a breakdown here will be easy. As thick as the kumo is, expect some backing and filling before we are to see any sharp downside moves.

240 minute: The 4 hour timeframe shows that we managed to hold our uptrend line on Friday. A break through this level gives the go-ahead for a short trade with confirmation coming on a move below 97.53 (denoted by pink line). Near term resistance should be found at 100.50 - 101.00 area.

Futures Charts of Interest (01/08/12)

Starting the week off looking at some bond charts, we are clearly sitting at critical levels here. All of our bond charts (30-yr, 10-yr, 5-yr) are bullish from an ichimoku perspective. Respective kumo are bullish, tenkan-sen above kijun-sen, and chikou above prior price levels. 

Shorter terms bonds have held up better, relatively, than the 30-yr, which essentially pierced it's recent uptrend line. We have been basing out for the past 4 months or so and I believe it will soon come time to see whether or not the complex has been setting up for continuation higher, or a possible reversal or trend.

The chart above is for the March Eurodollar (/GE) contract. Clearly we can see an inverted H&S pattern with a neckline breakout looking imminent. A breakout here brings us a measured move to 99.72, which would equate to new contract highs. I would love to hear some thoughts on the implications of such a move from some of the bond guys, whom I respect dearly (you know who you are).

Above we have a 240 minute chart of copper. Many traders have been watching copper do its triangulation thing over the past months and, here too, we appear to be coming to a resolution. We broke out of a smaller triangle within our triangle last week and appear to be coming back to backtest. 

We are sitting at a critical area. If the 3.39 level is not held, I'd expect to see an attempt at a downside break, and vice versa. Very difficult to anticipate anything here.

I believe all these charts along w/ my analysis of crude here, point us to the fact that the stars seem to be aligning for our next significant movement in our markets. My guess, if I had to make it, would be to lean higher in the commodity and equity space, along with a potential bond top. Regardless, it'll be important to watch for a resolution of these patterns as well as follow through.

Wheat has treated me well over the end of 2011 and beginning of 2012. I believe we may be in a massive longer term falling wedge. Shorter term, I am watching the current levels to try a long entry. I think the charts above are pretty self-explanatory but please do not hesitate to ask if you have questions or disagree.