MAP Reading a chart is like reading a road map. It not only tells you where you are, it tells you where you are going
After dropping $90/tonne from the high of $657.50 in September, at the time of this writing, prices on the March 2013 canola futures contract have rallied $50/tonne since the USDA report was released on January 11, 2013.
Thanks to phenomenal demand and improving basis levels, cash prices are back to the crop-year high ($14.50/bushel). For farmers with near-term cash flow commitments, this seasonal rally in January couldn’t have come at a better time.
One of the unique aspects of charting and technical analysis is its ability to cut through the news. The news is always the most bullish at the top and it is for this very reason some farmers may have been reluctant to sell in September 2012.
The front-page headlines were depicting the worst drought in the United States Midwest since the 1950s. Bullish news causes farmers to let their guard down, as they are lulled into a false sense of security believing prices will remain high or possibly rally further.
However, the charts told a different tale. On Sept. 4, 2012, reversal patterns (sell signals) appeared on the charts in the soybean complex — alerting experienced traders to the impending downturn, which spilled over to the canola market.
Bull markets die under their own weight because of long liquidation. This occurs when the longs liquidate their futures positions. At first, the smart money sells to take profit and eventually the others sell to cut losses. In this environment, prices collapse regardless of tight stocks.
Not until the long liquidation is over, do prices turn back up. This is evident of the open interest declining on the break and increasing once prices exceeded $600/tonne on the nearby canola futures contract.
The news is always bearish at the bottom. Leading up to the USDA report on Jan. 11, 2013, the news of a potential record soybean crop in South America loomed over the market. This in turn caused some farmers to panic and sell a portion of their canola and soybeans on the fear of prices going lower.
However, the charts portrayed a different picture. Based on the monthly chart, the major uptrend in the canola market was firmly intact with the harvest low of $570 proving to be a strong area of support.
Reading a chart is similar to reading a road map. It not only tells you where you are, but where you are going.
On Monday, Jan. 14, 2013, the day after the USDA report, prices on the daily March 2013 canola chart gapped higher. This gap is illustrated in the accompanying chart and is called a breakaway gap, which is a key indicator that prices are about to rally. Since then, prices have exploded $50/tonne higher.
A gap is a price range within which no trading takes place. In this case, the current day’s low price is higher than the previous day’s high, which is an upside gap.
The breakaway gap depicts a major shift in dynamics. Seldom will prices fail to do what is expected when a breakaway gap materializes.
Prices then completed the rectangular formation, which is a pattern seen at market bottoms. Resistance was at $600 and support came in at $570.
The breakout from a rectangle is considered to be highly reliable as a forecasting tool. Measuring the height of the rectangle and extrapolating it above the upper boundary at $600 provides a minimum measurement to $630.
The rectangle basically outlines a trading range in relative balance, with neither buyers nor sellers able to gain a lasting advantage. Prices were trendless until the buying at the upper boundary exceeded the selling. This is when the scales were tipped and prices broke out of the formation.
This not only cleans out the supply of contracts offered for sale, which had previously halted the advance, but it puts all shorts into a losing position. Short covering and fresh buying above $600 causes the market to rally.
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