Thursday, May 17, 2012

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).