Drozd: Oat market rally nears historical high

Oat futures prices at the Chicago Board of Trade have held up relatively well in comparison to the eight- and nine-month decline in the neighbouring corn and wheat markets.

Last month, oat prices on the nearby monthly chart reached US$4.30 per bushel, which is the highest price since July 2008, when the oat market posted a historic high of US$4.58.

Strong cash prices as high as C$4.25 per bushel in the Red River Valley (southeastern Manitoba) are indicative of attractive basis levels and a weaker Canadian dollar.

This year, basis levels in Saskatchewan have improved to $25 per tonne under the nearby futures contract — a stark contrast to 2008-09, when a glut of oats weighed on the North American market and the basis was an extremely unfavourable $100 per tonne under.

Stocks of oats in the U.S. are at a record low and carryout stocks in Canada are estimated by Agriculture and Agri-Food Canada to be 525,000 tonnes in 2012-13, one million tonnes less than in 2008-09.

Randy Strychar at Ag Commodity Research is estimating a 443,000-tonne carryout in 2012-13 and a marginal increase to 560,000 tonnes in 2013-14. Both estimates are, however, well below the five-year average of 1.036 million tonnes and closer to the record low of 362,000.

Tight stocks have provided good underlying support to both cash and futures prices. Since the beginning of the 2012-13 crop year, futures prices have been trading in a $1 per bushel range. As illustrated in the accompanying chart, resistance is up at US$4.30 and support comes in at US$3.30.

Support and resistance are terms 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 daily bar charts, these areas will appear as well defined price ranges within the market fluctuations. The greater the amount of time spent and the number of contracts bought and sold in this range, the greater will be the potential for support or resistance in the future.

Another characteristic which helps to gauge the relative support or resistance of a price area is the vertical distance the market must rise or fall prior to reaching the area in question. The greater the upward price move prior to reaching a resistance level, the greater will be the resistance. Conversely, the greater the market decline prior to reaching a support level, the greater should be the support at that area.

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

When prices break down through the lower boundary, then all recent buyers are holding losing positions, so a long liquidation break can occur.

Conversely, if the congestion range is resolved by an upside breakout, then all recent sellers are holding losing positions and a short-covering rally may ensue.

The concept of support and resistance and the market’s reaction when it moves into a support or resistance area are among the most interesting facets of chart study.

Where a classic formation may not appear on a chart for several months, one can be reasonably sure that there is always a support or resistance area, even if minor, not very far from the market. This is important because it can help one formulate expectations of future price action.

Farmers and ranchers can enhance their marketing skills by understanding where support and resistance levels are on the charts. This is extremely important, as support and resistance levels define the parameters of the major trend and illustrate where future rallies and declines are likely to fail. This in turn provides invaluable price objectives on where to buy and sell.

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.

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