There is a seasonal tendency for grain prices to come under pressure during harvest, as increased deliveries weigh on futures prices and basis levels deteriorate as merchants are offered more grain for sale than they require at that time. Stored grain is generally in tighter hands once harvest winds down and often requires an incentive of higher prices and an improvement in basis levels to entice farmer selling.
An oops, a technique I learned from industry veteran Larry Williams, indicates an immediate change in direction. At the bottom of a slide in prices, the first hint of a possible oops developing begins when a market opens below the previous period’s range. This is when a market gaps lower on the opening, which is more commonly seen on a daily chart. Therefore, an oops has more prominence when it occurs on a weekly or monthly chart.
In the example I’ve illustrated in the accompanying weekly nearby chart, the price gapped below the previous week’s range at the beginning of the week and then prices rallied back to fill the gap by the end of the week. A buy signal was generated as soon as prices moved back up to the previous week’s low, thus filling the gap and completing the oops.
Prices close poorly at the end of the first week, so the shorts are comfortable and confident heading home for the weekend. The market’s performance provides encouragement and reinforces the expectation of greater profits. The following week’s activity starts out with the shorts in the driver’s seat, as prices start out by gapping lower.
However, the resolve of the shorts is quickly tested when prices are unable to demonstrate follow-through weakness. Once prices rally back to fill the gap, that catches the attention of the shorts (market participants who had previously sold a futures contract). The immediate outlook for prices is abruptly put in question. Shorts respond to strengthening prices by exiting the market. Some of the shorts begin buying back their short positions to protect profits and others to minimize losses. This causes a short-covering rally.
Would-be longs (market participants who purchase futures contracts), noticing the change in sentiment, are quick to get in on the act by establishing long positions. Their buying helps to fuel the ensuing rally.
Oat prices were contained in a 40-cent trading range for 15 weeks, with support at $1.86 and resistance being $2.26.
Support and resistance areas evolve because equilibrium is reached between buyers and sellers. Trading in a horizontal congestion area, the market attracts buying around the bottom of the range ($1.86) and selling in the top portion ($2.26). The congestion range was resolved by an upside breakout above $2.26, so a pullback to this area will encounter increased buying – that is, support – 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.
If prices, upon returning to the support area, move more than halfway through the area on the first thrust, odds favour the support area ultimately being broken. If prices, however, begin to congest or turn up prior to reaching the midpoint, then chances are greater that the support area in question will hold.
This analysis indicates the oat market has seen the lowest prices for the year and farmers should anticipate an improvement in basis levels and higher cash prices into the first half of 2010.
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– 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 in the markets influencing agriculture. The information contained herein is deemed to be from sources that are reliable, but its accuracy cannot be guaranteed. Visit us online atwww.ag-chieve.ca/cooperator/ for more grain marketing ideas and educational tools, or call toll-free 1-888-274-3138 for a free consultation.