Larry Baer's Technicals: Grains Continue Higher, And Buy Signals Keep Coming

August 02, 2012

Historic drought in Midwest pushing wheat, soybeans higher and corn into a supertrend.

 

Disclaimer: Futures, options and forex trading is speculative in nature and involves substantial risk of loss. These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time, persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives.

 

Wheat

Wheat futures (both September and December contracts) indicated a fresh buy signal on the daily chart Monday (7/30). If wheat closes below its 20-period simple moving average, I’d suggest waiting for a fresh buy signal or a change in trend.

The trend is up on the weekly chart for wheat. The nine-period SMA is trending above the 20-period SMA. Wheat futures issued a King’s Cross counter-trend buy signal on the monthly chart in June. The King’s Cross is my attempt to account for why, shortly after a change in trend, a market often puts in its extreme. What I discovered is that the trend had not actually changed; rather, it was just an event—a news event, short or long covering, etc.—that caused a correction. After this “event,” the market would often turn around and resume its previous trend.

 

MONTHLY WHEAT

MONTHLY WHEAT CHART

 

Soybeans

The November soybeans (as well as September and August contracts) similarly are suggesting buy signals on the daily chart (7/30). Soybeans gave a buy signal on the weekly chart two weeks ago, and a close above $17.61 even on Friday will suggest a fresh buy signal on the weekly chart. Following a King’s Cross counter-trend buy signal on the monthly chart in February, the trend has now changed to the upside on the monthly chart.

Corn

Old crop corn (September contract) and new crop corn (December) issued buy signals on the daily chart last Friday (7/27), following some nice consolidation from this overbought market and has now, for the time being, resumed its super-trend upward. I define a supertrend as a market that is trending above its nine-period SMA. The trend is up on the weekly chart, and corn is showing a King’s Cross counter-trend buy signal on the monthly chart for the month of July.

 

DAILY CORN

CORN DAILY CHART

 

The current drought in the Midwest is being compared with droughts that lasted several years in the 1950s and 1930s, which is why surging old crop prices are adding support to new crop prices. It should also be noted that drought in the Black Sea wheat-growing regions has some estimating that Russia may cut grain exports by half in the 2012/13 marketing year.

 

 

Ethanol Mandates

The livestock and poultry industries submitted a petition to the EPA to temporarily suspend the mandate requiring ethanol to be blended into gasoline. This coalition claims the drought that is pushing prices to record levels is causing “economic harm” from soaring costs to feed their animals.

The ethanol industry disputes this claim and contends that those in the livestock and poultry industries are attempting to increase their profits at the expense of grain farmers. In my opinion, corn has been at high prices before and we have never had to resort to stopping the use of ethanol in gasoline.

If the EPA were to lift the mandate for blending, corn would have a sizable retracement. This would be followed by a short-term rally across the energies, but the current inventories of crude and gasoline are so high that I believe this rally would be short-lived.

Energies Remain In A Pivotal Area

Natural Gas

Natural gas issued a buy signal Monday (7/30) after three trading sessions of apparent consolidation. This is the fourth buy signal natural gas has shown since the trend changed to the upside on the daily chart in mid-June.

On the weekly chart, natural gas is super-trending to the upside, gave a buy signal two weeks ago, and so far this week natural gas is showing a fresh buy signal. Natural gas also sits atop some strong support. On the monthly chart, natural gas showed a bottoming formation in April as it failed to confirm that it may be in a longer-term downtrend. It closed above its 20-period SMA on the monthly chart, turning that resistance into some strong support.

Gasoline RBOB

The RBOB hit its highest level since mid-May as the August contract of gasoline RBOB futures issued a fresh buy signal Wednesday (8/01) and gave a buy signal last Friday (7/27) on the daily chart, which came after a nice retracement and has again closed above its 100-period SMA, a bullish indicator. On the weekly chart, RBOB suggested a bottoming formation the last week of June and has closed above several resistance areas, which now act as support.

Following this bottoming formation, gasoline had a nice three-week rally and I am now waiting for a fresh signal. So far on the monthly chart, gasoline RBOB is giving a buy signal for the month of July and looks to resume super-trending. The nine- and 20-period SMAs are so close on the monthly chart that a price movement either direction may have major technical ramifications.

 

DAILY GASOLINE RBOB DAILY

GASOLINE RBOB DAILY CHART

 

 

WTI

West Texas Intermediate crude oil had been super-trending on the daily chart for three weeks in July before a major correction and now looks a bit top-heavy since it was not able to hold above its nine-period SMA Monday (7/30). Low trading volume, also known as the “summer doldrums,” may hamper a rally. Monday (7/30), crude recorded its lowest trading volume since May 25.

WTI was displaying a bottoming formation the last week of June on the weekly chart, then rallied, but may struggle moving higher with its strong resistance overhead. The trend is down on the weekly chart and I am now waiting for a fresh sell signal. WTI sits atop support on the monthly chart and the trend is up, but forgoing a rally, the trend will most likely change to the downside. Closing below this support level and a change to the downside will set up tall technical hurdles for the crude to jump over.

 

WEEKLY WTI

WTI WEEKLY CHART

Heating Oil

Heating oil’s charts looks somewhere in between the crude and the RBOB. Similar to the crude, heating oil was super-trending for much of July before a major pullback and now sits atop its nine-period SMA. On the weekly chart, heating oil bottomed out at the end of June and is now wedged between support and resistance. A price move either way may be telling for its longer-term direction. On the monthly chart, heating oil looks as if it’s struggling to move higher. It has been moving sideways since April 2011 and the trend may be about to change to the downside.

For Your Consideration

Keep in mind that the European central bank’s Governing Council is scheduled to meet today in Frankfurt. This meeting may give strong support to the euro currency, thus weakening the U.S. dollar.

In my opinion, regardless of the decision, they’re building a dam out of sand; meaning, if there is a big move in the short term, the euro may continue its overall downtrend with the U.S. dollar rallying in the long term. The euro may see the 118 level and possibly see prices as low as 112.

 


 

Contact Larry Baer at [email protected] or (312) 277-0112.

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Futures, options and forex trading is speculative in nature and involves substantial risk of loss. All known news and events have already been factored into the price of the underlying commodities discussed.

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