This market’s steady decline may have come as a surprise to some followers of oil, but for those who study charting and technical analysis, they were first alerted to the impending downturn in June 2014.

The first tell-tale sign of a change in trend occurred on June 23, when a two-day reversal materialized on the daily NYMEX WTI crude oil futures charts. By week’s end, a two-week reversal appeared on the weekly nearby futures chart, followed by the development of a two-month reversal on the monthly nearby chart on July 31.

The validity of a market signal is greatly enhanced when a reversal pattern appearing on a daily chart is closely followed by reversal patterns on the longer term charts. Identifying such patterns greatly enhances one’s ability to identify changes in trend, which is a real advantage for making informed marketing decisions.

The probability of a valid trend turn is increased when a number of technically significant events occur at or near the same point in time. Shortly after the two-month reversal occurred, prices dropped below an important trendline, which caused the price of oil to plummet further. This is identified as point A in the accompanying chart.

Trendlines

During the course of a trend and all the fluctuations which compose it, there is a well observed characteristic for prices to closely follow a sloping straight line path. During a period of rising prices, this path is determined by a line drawn across the lows of the reactions. When an emerging trend can be identified and followed to its conclusion, it translates into opportunity. The use of trendlines is a valuable tool for accomplishing this.

In a rising market, for a trendline to be both valid and reliable there should be at least three points of price contact, each of which coincides with the low of a market reaction. These price reactions must bottom at progressively higher levels. Beyond the minimum of three contact points, the more times prices bounce off a trendline in a bull market, the more valuable it becomes as a trend indicator. Similarly, the longer the trendline continues without being breached, the greater becomes its technical significance.

Once a trend begins in earnest, it has a very high tendency to persist. Thus, a properly constructed trendline may be touched several times by the fluctuating market during the course of big move without being broken. The longer the trendline lasts, the more significant becomes its eventual penetration (A), as an indicator of trend change.

Therefore, it is important for farmers to keep an eye on the outside markets such as energy, metals and currencies, as these markets can and do influence the price of grain.

For example, a weak crude oil market can decrease the profitability of the ethanol and biodiesel industries and when this happens, it limits the upside potential of corn and soybean values. In turn, this weakness has the ripple effect of weighing on like crops such as feed grain and canola.

Canada, being a country rich in resources, is especially impacted by the price of oil. Falling oil prices not only weigh on the TSX and slow the economy, especially in Alberta, but also weaken the Canadian dollar. This list is not all-inclusive, but intended to demonstrate how closely tied the energy sector is to so many aspects of our day to day lives.

Therefore, it’s imperative to watch the outside markets, or you could find them sneaking up on you.

Send us your questions or comments about this article and chart.

— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about our grain marketing advisory service and to see our latest grain market analysis. You can call us toll free at 1-888-274-3138 for a free consultation.

The post Drozd: Crude falls to four-year low, casts shadow across commodities appeared first on Alberta Farmer Express.

The head-and-shoulders top is considered the most reliable chart formation for indicating a reversal of the trend and for having the greatest forecasting value.

A head-and-shoulders top is composed of three successive price advances, with the second rally reaching a higher level than either of the other two.

The left shoulder — Point A in the accompanying chart — marks the end of a substantial price rise, followed by a downward reaction. In the price rise forming the left shoulder, the trading volume should be higher than in any other phase of the pattern.

Another rally follows which exceeds the left shoulder and forms the head (B). Trading activity is high, but not usually as great as the formation of the left shoulder. A second pullback should culminate at approximately the same price level as the first reaction.

A third rally forms the right shoulder (C), but it fails to get as high as the head. The volume during the formation of the right shoulder must be less than that of either the left shoulder or head or the pattern may be false.

Market psychology: The behaviour of speculative participants during the development of this classic formation is quite predictable. On the advance forming the left shoulder, the shorts are on the run covering their positions, while longs who have been enjoying the ride begin selling to take profits, so trading activity is very heavy.

As the buying and selling subsides, the market undergoes a normal correction which attracts buyers and prices begin moving up again.

When prices on this upward leg surpass the left shoulder, buyers are attracted to the market who not only missed the preceding bull move, but also the opportunity to buy during the decline. This advance forms the head and as prices reach a new high many traders will interpret the move as an indication another substantial price advance has begun. However, the surge of buying climaxes at the head and a second decline begins.

This pullback is seen as another chance to get long, so prices begin to move up for the third and final time.

During the third price advance, it will appear to the longs who are suffering losses that the market is going to bail them out. However, right shoulder highs tend to fall short of expectations, as the buying power has been virtually exhausted.

Never seeing their positions move into the plus column on the third and final advance of the head and shoulders top formation is unsettling to the longs. As prices complete the right shoulder and begin to decline, these longs become willing sellers in order to limit their losses.

When the price drops below the reaction lows, all new long positions are losing money, so the market is poised for the start of a new downward move caused by long liquidation.

The head-and-shoulders pattern is completed when the price penetrates the neckline (D), which is a line drawn from left to right, connecting the bottoms of the two reactions.

After a top is completed, a minimum price objective can be forecasted by measuring the vertical distance from the head to the neckline, then projecting this distance down from the point of the neckline penetration. This price objective is a minimum forecast. The longer the time period required for the head-and-shoulders top formation to form, the greater will be the ensuing move.

Chart formations such as the head-and-shoulders top are reliable tools that farmers are adopting to determine future price direction. Send us your questions or comments about this article and chart.

— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about our grain marketing advisory service and to see our latest grain market analysis. You can call us toll-free at 1-888-274-3138 for a free consultation.

The post Drozd: Classic head-and-shoulders top signals end to bull soybean market appeared first on Alberta Farmer Express.

At the end of May, a harami alerted producers to a downturn in the meal market. A harami is a reversal pattern often seen on a candlestick chart. This particular harami materialized at the height of the rally on the CBOT soybean meal monthly nearby chart and is illustrated in the accompanying chart.

The harami is similar to an inside day used in bar chart analysis. However, this interpretation suggests a change in trend. The small body of the harami must be contained by the real body preceding it.

A rising wedge formation also appeared in the accompanying chart. In June, prices slipped below the lower boundary of this pattern, which indicates additional weakness. Prices will generally go back down to where the rising wedge began.

Rising wedge

A rising wedge is an upward slanting formation which contains all price activity between its converging boundaries. The essential feature distinguishing a rising wedge from any of the various triangles (symmetrical, descending & ascending) is the accentuated slope of the pattern.

The rising wedge pattern implies a minor or intermediate turn. The pattern is completed when prices break out from their converging boundaries. For a rising wedge this means a decline through its lower boundary. Wedges occur with a fair degree of frequency in the futures markets. As a rule, after the pattern is completed prices should retrace all of the vertical movement comprising the wedge.

Market psychology: Rising wedges will often begin with a high volume day marking at least a temporary end to the current price move. In the case of a rising wedge, this move will have been down.

Typically, the market’s decline has had the speculative longs on the run. Their selling exodus peaks and the wedge begins to form. With the weakest longs now sold out, additional selling pressure at prevailing prices is absent. All remaining longs in the market have made the financial and psychological commitment to at least hold for a rally. With selling abated, prices begin to recover. Progress is slow but the pattern is clear: a series of higher minor highs and lows. At first, normal profit taking by the shorts triggers the rally, but soon, bargain hunters make their presence felt by buying on the now small price setbacks. The market’s ability to rally to higher minor highs attracts additional buyers. Lows begin to rise faster than the highs, giving the pattern its narrowing shape. The converging boundaries of the rising wedge signify its limited duration.

Speculative buying continues to rally the market but volume fails to grow. This is a reason for caution. There is no great quantity of contracts for sale overhead, but each time buying diminishes the market backs down. Price advances need buying in order to be sustained. The advances will progressively gain less ground until all the potential buyers have been satisfied. At this point, instead of simply backing off, the market begins to fall under its own weight. Recent longs, as well as new shorts now comprise the sellers. Volume will normally increase at this time, confirming that the rising wedge pattern and the rally have been completed.

Old-crop soybean values are beginning to slip, as the fear of running out in the U.S. is waning. Although 2013-14 stocks are tight, USDA is estimating U.S. farmers will seed a record area to soybeans in 2014. The crop is in good shape and this is weighing on soybean and meal values.

By studying the charts and using technical analysis, producers can gain the upper hand in knowing when markets are about to change direction.

Send us your questions or comments about this article and chart.

— David Drozd is president and senior market analyst for Winnipeg based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about our grain marketing advisory service and to see our latest grain market analysis. You can call us toll free at 1-888-274-3138 for a free consultation.

The post Drozd: Livestock producers look ahead to lower meal costs appeared first on Alberta Farmer Express.

Four months after turning down from a high of $530 per tonne on Oct. 24, 2013, a tweezer bottom alerted savvy traders and farmers alike that the market was about to turn up.

A tweezer bottom materializes when the same low occurs for two consecutive days. In this case, the November futures posted a new contract low of $431.50 on Feb. 13 and 14, 2014. A tweezer bottom is a reversal pattern seen at market lows and it is especially reliable when it develops at the bottom of a major decline.

When the tweezer bottom occurred, farmers were calling us and asking, “How high?” To answer that question, I turned their attention to the charts to indicate the fibonacci retracement levels.

Fibonacci retracement

This is a popular tool used in technical analysis based on key numbers identified by mathematician Leonardo Fibonacci in the 13th century. A fibonacci retracement is the potential correction of a market’s original move in price. In a downtrending market, this refers to areas of resistance where prices have the potential of rallying to before they resume their downward progression. This is advantageous for canola growers to know, so they can determine targets for making a sale.

As illustrated in the accompanying chart, the 61.8 per cent fibonacci retracement level was $492.40, 50 per cent was $480.80 and 38.2 per cent came in at $469.20. A market typically has a 38.2 to 61.8 per cent retracement. It is important to note that downtrending markets such as canola rarely have more than a 61.8 per cent retracement.

Fibonacci retracements use horizontal lines to indicate areas of resistance at key fibonacci ratios before a market continues in the original direction. These levels are created by drawing a trendline between two extreme points, identified as (A) 0.00 per cent, the start of the retracement, and (B) a 100 per cent retracement of the original move, and then dividing the vertical distance by the key fibonacci ratios of 23.6, 38.2, 50 and 61.8 per cent. The two extreme points were (A) $431.50 on Feb. 14, 2014 and (B) $530 on Oct. 24, 2013.

While minor 23.6 per cent retracements do occur, the most common fibonacci retracements are 38.2 and 61.8 per cent, with 50 per cent being in the middle. The 50 per cent retracement level is not really a fibonacci ratio, but it is used because of the tendency for a market to continue to the 61.8 per cent retracement level, once it completes a 50 per cent retracement.

Market psychology: A tweezer bottom signals an abrupt change in trend. Traders who were short the market quickly questioned the market’s strength, as prices challenged the first area of resistance at $454.80. After all, nothing had changed fundamentally, with Canadian ending stocks of canola expected to be record high in 2013-14.

However, markets have short covering rallies to alleviate the oversold conditions. Once prices exceeded $454.80, which was the 23.6 per cent fibonacci retracement level, the market ran into buy stops a few dollars above that point of resistance (C).

Buy stops are placed above the market, typically just above a key point of resistance to protect the profit of those who shorted the market at higher levels. Once triggered, they become orders to buy at the market, driving prices up until willing sellers are uncovered.

This buying quickly triggered additional buy stop orders when the market soared above the 38.2 per cent fibonacci retracement level. With the amount of buying overwhelming the available supply of contracts for sale, prices rallied to the 50 per cent retracement level. This now provided optimism that prices could rally to the 61.8 per cent retracement level.

Farmers who were interested in making an additional sale and targeted the 61.8 per cent retracement level were rewarded for their patience when prices achieved $492.40 on March 18, 2014.

Send your questions or comments about this article and chart to info@ag-chieve.ca.

— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about our grain marketing advisory service and to see our latest grain market analysis. You can call us toll-free at 1-888-274-3138 for a free consultation.

The post Drozd: Tweezer bottom signaled reversal in Nov. canola appeared first on Alberta Farmer Express.

Referencing the March 2014 oat futures contract in Chicago, this rally began from a contract low of $3 per bushel on Oct. 2, 2013, the same day a harami materialized on the candlestick chart.

A harami is a reversal pattern seen at market bottoms and tops. In this case, it indicated the market was about to turn back up. The market ground 60 cents higher before running into an area of resistance at $3.60.

The market paused briefly, before prices exploded through the upper boundary of the downtrending channel, which is illustrated as A on the accompanying chart.

The shorts were caught looking the wrong way. They may have been expecting the market to turn down from resistance based on the fact Canadian oat ending stocks are estimated by Agriculture and Agri-Food Canada to be 1.4 million tonnes in 2013-14 and forecast to grow to a record 1.7 million tonnes in 2014-15.

However, this futures market is located in Chicago and it’s reflecting the oat situation in the U.S. — not in Canada.

Commercial stocks of oats in the U.S. are at an extremely low level. U.S. oat merchants are in dire straits, as they are nearly running on empty.

As of Feb. 21, commercial oat stocks in Chicago, Superior/Duluth and Minneapolis are down to a mere 3.86 million bushels. This compares to 31 million bushels two years ago and 21 million bushels one year ago.

The problem is rail cars are not available to haul oats to the United States. Producer cars have been providing some relief, but there is not enough volume to satisfy the demand.

Lack of movement is causing oat bids to dry up on the Prairies, as line companies are not going to buy oats they cannot move. This situation will not be resolved until oats move into the U.S. in large volumes, and indications are this may not occur any time soon.

Downtrending channel

In a downtrend, the channel’s upper boundary is the downtrend line. For a trendline to be both valid and reliable there should be at least three points of price contact, each of which coincides with the high of a market reaction. In a declining market the three points of contact correspond to the rally highs, each topping out at a progressively lower level. The lower boundary, the return line, is parallel and drawn across the lows of each progressively lower decline.

Market psychology: When a channel develops in a downtrending market, a breakout through the upper boundary not only cleans out the supply of contracts which had previously halted the advance, but it puts all shorts into a losing position. To understand where, on a chart, the anxiety level of shorts or longs increases is very useful, for it is shortly thereafter that their contracts become fuel for the fire.

When an upside breakout occurs, the market will encounter increased buying from longs wishing to add to positions acquired near the bottom of the trading range as well as from shorts who, having sold in the upper portion of the range, are seeking to cut their losses.

There will come a point when the advance begins to accelerate sharply. Much of the patience of those waiting for a big break will have worn thin by this time, so more buying is gradually thrown into the market at the prevailing price level. As this occurs, the demand which had trailed the market is being absorbed. When the price finally does turn down for real, the demand will have been totally satisfied or the volume of selling simply overpowers what little buying remains.

Send us your questions or comments about this article and chart at info@ag-chieve.ca.

— David Drozd is president and senior market analyst for Winnipeg based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about our grain marketing advisory service and to see our latest grain market analysis. You can call us toll free at 1-888-274-3138 for a free consultation.

The post Drozd: Harami signaled market low before oats’ record-high rally appeared first on Alberta Farmer Express.

Although the weak Canadian dollar makes vacationing in the southern U.S. more expensive, the lower Canadian dollar is supportive to Canadian grain prices.

In reality though, grain prices in Canada tend to be higher when the Canadian dollar is at par with the U.S. dollar. However, higher grain prices were not a result of the loonie’s strength.

Higher grain prices were a result of a low U.S. dollar, which makes U.S. grain more attractive to foreign buyers which in turn increases demand, draws down stocks and drives up U.S. grain prices. This occurred in the early 1970s and in 2008 when grain prices realigned to new higher trading ranges. In both instances, the Canadian dollar was at par or better.

Farmers who are paid in U.S. currency for selling grain and livestock into the United States benefit on the exchange rate when the Canadian dollar is low relative to the U.S. dollar.

Farmers who are purchasing soybean meal or machinery in the U.S. benefit on the exchange rate when the Canadian dollar is relatively strong against the U.S. dollar. This also applies to those purchasing investment or retirement property in the United States and to Canadian snowbirds going south for the winter.

As a farmer, you could encounter both scenarios. In a year like this, you may be getting paid in U.S. currency for selling durum wheat to the U.S. and in another year you may need to convert the Canadian dollar to U.S. currency to pay for equipment purchased in the United States.

Knowing when to convert your money could save you thousands of dollars. Defining areas of support and resistance are useful tools for identifying where a market will change direction or possibly accelerate within the current trend.

Support and resistance

Support and resistance are terms used to describe a price level where the buying or selling of futures contracts is expected to noticeably increase and at least temporarily halt the current direction of the market.

On bar charts these areas will appear as well-defined price ranges within which the market traded prior to making a decisive move up or down.

Market psychology

Support and resistance areas evolve because equilibrium is reached between buyers and sellers. The market attracts buying around the bottom of the range and selling in the top portion.

If prices break down through the lower boundary (illustrated as A in the accompanying chart), then all recent buyers will be holding losing positions. Any return move back to this level represents an area in which to liquidate a long position at break-even or with a reduced loss. The offering of contracts for sale at this area also increases, as those who sold in the upper portion of the trading range now have profits and may utilize the bounce to sell more contracts.

Conversely, if the congestion range is resolved by an upside breakout (illustrated as B), a pullback to this level will encounter increased buying from longs wishing to add to positions acquired near the bottom of the trading range as well as from shorts who having sold in the upper portion of the range are seeking to cut their losses.

Support or resistance areas can help one formulate expectations of future price action. These areas are extremely important as they illustrate where future rallies and declines are likely to fail. As illustrated in the accompanying chart, there were ample opportunities to convert the Canadian dollar to U.S. currency every time the loonie bounced against the line of resistance.

Farmers and livestock producers can certainly benefit from keeping a watchful eye on the Canadian dollar.

Send your questions or comments about this article and chart to info@ag-chieve.ca.

1. Chart as of December 13, 2013

The post Canadian dollar falls to a 3-1/2-year low just as snowbirds head south appeared first on Alberta Farmer Express.

Although the weak Canadian dollar makes vacationing in the southern U.S. more expensive, the lower Canadian dollar is supportive to Canadian grain prices.

In reality, though, grain prices in Canada tend to be higher when the Canadian dollar is at par with the U.S. dollar. However, higher grain prices were not a result of the loonie’s strength. Higher grain prices were a result of a low U.S. dollar, which makes U.S. grain more attractive to foreign buyers, which in turn increases demand, draws down stocks and drives up U.S. grain prices. This occurred in the early 1970s and in 2008 when grain prices realigned to new higher trading ranges. In both instances, the Canadian dollar was at par or better.

Farmers who are paid in U.S. currency for selling grain and livestock into the U.S. benefit on the exchange rate when the Canadian dollar is low relative to the U.S. dollar.

Farmers who are purchasing soybean meal or machinery in the U.S. benefit on the exchange rate when the Canadian dollar is relatively strong against the U.S. dollar. This also applies to those purchasing investment or retirement property in the U.S. and to Canadian snowbirds going south for the winter.

As a farmer, you could encounter both scenarios. In a year like this, you may be getting paid in U.S. currency for selling durum wheat to the U.S. and in another year you may need to convert the Canadian dollar to U.S. currency to pay for equipment purchased in the United States.

Knowing when to convert your money could save you thousands of dollars. Defining areas of support and resistance are useful tools for identifying where a market will change direction or possibly accelerate within the current trend.

Support and resistance

Support and resistance are terms used to describe a price level where the buying or selling of futures contracts is expected to noticeably increase and at least temporarily halt the current direction of the market.

On bar charts these areas will appear as well defined price ranges within which the market traded prior to making a decisive move up or down.

Market psychology: Support and resistance areas evolve because equilibrium is reached between buyers and sellers. The market attracts buying around the bottom of the range and selling in the top portion.

If prices break down through the lower boundary (illustrated as A in the accompanying chart), then all recent buyers will be holding losing positions. Any return move back to this level represents an area in which to liquidate a long position at break-even or with a reduced loss. The offering of contracts for sale at this area also increases, as those who sold in the upper portion of the trading range now have profits and may utilize the bounce to sell more contracts.

Conversely, if the congestion range is resolved by an upside breakout (B), a pullback to this level will encounter increased buying from longs wishing to add to positions acquired near the bottom of the trading range as well as from shorts who having sold in the upper portion of the range are seeking to cut their losses.

Support or resistance areas can help one formulate expectations of future price action. These areas are extremely important as they illustrate where future rallies and declines are likely to fail. As illustrated in the accompanying chart, there were ample opportunities to convert the Canadian dollar to U.S. currency every time the loonie bounced against the line of resistance.

Farmers and livestock producers can certainly benefit from keeping a watchful eye on the Canadian dollar.

Send us your questions or comments about this article and chart.

— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about our grain marketing advisory service and to see our latest grain market analysis. You can call us toll free at 1-888-274-3138 for a free consultation.

The post Drozd: Canadian dollar hits 3 1/2-year low as snowbirds head south appeared first on Alberta Farmer Express.

Prices have been under pressure since a Tweezer Top developed in July 2012 with the market topping out at $10.35 per bushel. A Tweezer Top is a technical formation that indicates a change in trend and it materializes when a market posts the same high in two consecutive periods. This pattern is illustrated in the MGEX weekly nearby chart accompanying this article.

Since then, the market has been putting in lower lows and lower highs and this price action has subsequently evolved into a downtrending channel.

Downtrending channel

During the course of a trend and all the fluctuations which compose it, there is a well-observed characteristic for prices to closely follow a sloping straight line path. During a period of falling prices, this path is determined by a line drawn across the highs of the reactions. When an emerging trend can be identified and followed to its conclusion, it translates into opportunity. The use of trendlines is a valuable tool for accomplishing this.

In a falling market, for a trendline to be both valid and reliable there should be at least three points of price contact, each of which coincides with a rally high, and each topping out at a progressively lower level. Beyond the minimum of three contact points, the more times a trendline can check a price advance in a bear market, the more valuable it becomes as a trend indicator.

There are five reaction highs depicted in the channel I’ve illustrated in the accompanying chart. Similarly, the longer the trendline continues without being penetrated, the greater becomes its technical significance.

In a downtrend, the channel’s upper boundary is the downtrend line. It is drawn across the highs. The lower boundary is the return line and it is drawn parallel across the lows of each progressively lower decline.

One should be on the alert, studying the price activity during the course of a trend. If prices start to display an inability to reach the return line, this could prove to be an important first indication that the current trend is waning.

Market psychology

Price activity that lends itself to trendline and channel construction reflects a particular sequence of behaviour. As a new downtrend begins to emerge, sell orders materialize but many are at a limit price above the market. In the normal ebb and flow of the market some of this selling is satisfied when prices bounce. However, a portion of the offers are too high to be filled and when prices again begin to move down, some of these sellers jump in for fear of missing the move. The balance of unfilled selling will continue to trail the market in hopes of catching a price reaction. Most of these sellers will gradually lower their offers as the market declines.

Some profit-taking and short covering emerges on price bulges and as this occurs the offers which had trailed the market are gradually being absorbed. When the price finally does turn up for real, trendlines will be broken because the selling has totally dried up or the volume of buying simply overpowers what little selling remains.

After a period of downward movement, one must be on the alert for any subtle changes in this repetitive process, as they will show up clearly on the price charts. When price declines begin to fall short of the lower channel boundary, it is a clue that the existing price trend may be waning or at least getting ready to consolidate.

Send your questions or comments about this article and chart to info@ag-chieve.ca.

The post Spring wheat prices continue to slide down a slippery slope appeared first on Alberta Farmer Express.

Prices have been under pressure since a Tweezer Top developed in July 2012 with the market topping out at $10.35 per bushel (all figures US$). A Tweezer Top is a technical formation that indicates a change in trend and it materializes when a market posts the same high in two consecutive periods. This pattern is illustrated in the MGEX weekly nearby chart accompanying this article.

Since then, the market has been putting in lower lows and lower highs and this price action has subsequently evolved into a downtrending channel.

Downtrending channel

During the course of a trend and all the fluctuations which compose it, there is a well observed characteristic for prices to closely follow a sloping straight line path. During a period of falling prices, this path is determined by a line drawn across the highs of the reactions. When an emerging trend can be identified and followed to its conclusion, it translates into opportunity. The use of trendlines is a valuable tool for accomplishing this.

In a falling market, for a trendline to be both valid and reliable, there should be at least three points of price contact, each of which coincides with a rally high, and each topping out at a progressively lower level. Beyond the minimum of three contact points, the more times a trendline can check a price advance in a bear market, the more valuable it becomes as a trend indicator. There are five reaction highs depicted in the channel I’ve illustrated in the accompanying chart. Similarly, the longer the trendline continues without being penetrated, the greater becomes its technical significance.

In a downtrend, the channel’s upper boundary is the downtrend line. It is drawn across the highs. The lower boundary is the return line and it is drawn parallel across the lows of each progressively lower decline.

One should be on the alert, studying the price activity during the course of a trend. If prices start to display an inability to reach the return line, this could prove to be an important first indication that the current trend is waning.

Market psychology: Price activity that lends itself to trendline and channel construction reflects a particular sequence of behaviour. As a new downtrend begins to emerge, sell orders materialize but many are at a limit price above the market. In the normal ebb and flow of the market some of this selling is satisfied when prices bounce. However, a portion of the offers are too high to be filled and when prices again begin to move down, some of these sellers jump in for fear of missing the move. The balance of unfilled selling will continue to trail the market in hopes of catching a price reaction. Most of these sellers will gradually lower their offers as the market declines.

Some profit taking and short covering emerges on price bulges and as this occurs the offers which had trailed the market are gradually being absorbed. When the price finally does turn up for real, trendlines will be broken because the selling has totally dried up or the volume of buying simply overpowers what little selling remains.

After a period of downward movement, one must be on the alert for any subtle changes in this repetitive process, as they will show up clearly on the price charts. When price declines begin to fall short of the lower channel boundary, it is a clue that the existing price trend may be waning or at least getting ready to consolidate.

Send us your questions or comments about this article and chart.

— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about grain marketing advisory services, or call us toll-free at 1-888-274-3138 for a free consultation.

The post Drozd: Spring wheat prices continue down slippery slope appeared first on Alberta Farmer Express.

Corn on the nearby weekly futures contract has lost 50 per cent of its value since rallying to a record high of $8.43-3/4 in August 2012. Cash prices are closer to $3.50 per bushel — a price not seen since July 2010.

Pressuring the market is the United States Department of Agriculture’s estimate of a record 13.84-billion-bushel U.S. corn crop and a 1.86-billion-bushel carry-out for the 2013-14 crop year. This certainly alleviates the tight ending stocks situation experienced during the 2012-13 crop year when supplies were drawn down to 661 million bushels.

The last time the U.S. had a corn carry-out similar to this year’s forecast was in 2009-10, when the ending stocks were 1.7 billion bushels. During that period, the nearby futures contract traded between $4.20 and $3.20 per bushel.

Some are surprised prices have declined to current levels, especially farmers who may be growing corn for the first time. Last year’s record-high prices resulted in corn being one of the crops having the highest return. This inspired first-time growers to try their hand at producing a crop of corn this year.

Others may not have been surprised by the downturn given the reversal pattern that materialized on the monthly nearby futures candlestick chart, at the market’s high, 15 months ago.

Introduction to candlestick charting

Candlestick charting provides an insight into market activity that is not readily apparent with the conventional bar-type charts. When you see a black candle you know the sentiment is bearish. When the candle is white, it is bullish.

The Japanese are regarded as the true pioneers of market technical analysis. They began trading forward rice contracts (Futures) in 1654 and by the year 1750 had developed quite a refined system for analyzing the markets.

These same techniques have evolved over 2-1/2 centuries into an amazingly powerful modern-day charting method called candlestick. The Japanese method of charting is called candlestick because the individual lines resemble candles.

Basic construction of a candlestick line

The daily line shows the open, high, low and close. The thick part or candle is called the real body. It highlights the range between the open and close. If the close is above the open, then the body will be white. When the real body is black this simply means the close was below the open.

The lines above and below the real body represent the high and low ranges for the period and are called shadows.

A long black body illustrates a bearish period in the market with an opening near the day’s high and close near the day’s low.

A long white body is the opposite of a long black body and shows technical strength with an opening near the low and a close near the high in a wide range period.

Spinning tops are lines with small real bodies. The small body represents a tight range between the open and close. Spinning tops are regarded as neutral in most situations. However, when combined with other patterns they can be very significant, such was the case when the harami developed at the top of the corn market.

Harami lines

The harami line is similar to an inside day used in bar chart analysis. However, this interpretation suggests a waning in momentum and a possible trend change. As illustrated in the accompanying chart, the short black body of the harami must be contained by a long real white body preceding it.

A reversal pattern of any kind is more significant when it not only occurs at a market high, but when it appears on a long-term chart such as a monthly or weekly chart.

Having a basic understanding of candlestick charting is an invaluable tool for being alerted to the major turns in the market.

Send your questions or comments about this article and chart to info@ag-chieve.ca.

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