Drozd: Harami signaled market low before oats’ record-high rally

CBOT March oats as of Feb. 26. (Barchart.com)

Nearby oat futures contract posted a new historical high of $5.33 per bushel on Feb. 26. This exceeded the previous high of $4.58 in July 2008.

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 [email protected]

— 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.

 

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