Drozd: Oat prices explode on a short covering rally

Although the oat futures market is the most thinly traded cereal grain market in Chicago, it still provides reliable chart patterns and technical signals on when to buy and sell.

Reading a chart is much like reading a road map. It tells you where prices are going to go. Let’s begin this journey at the top of the map (chart) * .

A harami (A) developed at the height of a five month rally indicating prices were about to turn back down. Savvy farmers capitalized on this information by selling their old crop oats and by forward pricing a portion of their new crop production. 

These farmers were glad they didn’t hold out for $3 oats because fund selling drove prices below the steep line of support (B) and prices plummeted 60 cents in seven days. This equates to $60,000 for every 100,000 bushels of oats.

Prices then took a breather for the next five weeks. They remained in a narrow sideways trading range until another harami (C) materialized which indicated prices were about to experience another downturn.

Prices proceeded to grind 50 cents lower over the next three months. This price slide halted at an area of support identified by the previous low (D). It is important to note that old lows often become a new area of support.

It is not uncommon for reversal indicators to occur at a level of support. In fact two haramis (E) appeared at this market low. They indicated prices were ready to turn back up.

Farmers concerned about not having enough production to fill their deferred delivery contracts were able to react to the reversal indicators at this market bottom and cancelled their deferred delivery contracts before prices turned up.

Once prices pushed past the line of resistance (F), a short covering rally ensued and prices exploded 85 cents in two weeks.

This rally stalled at the previous high (A). It is important to note that old highs often become a new area of resistance (G). Farmers were able to take advantage of the recent rally by pricing oats into this area of resistance.

The Japanese are true pioneers of technical analysis of the markets. Their techniques have evolved from fairly simple beginnings, trading forward rice contracts (futures) in the 17th century to now include many sophisticated ways to analyze the markets including the amazingly powerful modern day charting method called “candlestick.”

Candlestick charting provides an insight into market activity

that is not readily apparent with the conventional bar type charts. A body is the range between the opening and closing price. A long black body illustrates a bearish period in the market with an opening near the day’s high and close near the day’s low.

A long white body is the opposite of a long black body and shows technical strength with an opening near the low and a close near the high in a wide range period.

Harami

Harami in Japanese indicates a change in trend.

As illustrated in the oval diagram (A), at the top of a market the small black body of this harami had to be contained by the long white body preceding it. 

At the bottom of a market, as illustrated in the oval diagram (E), the small white body of this harami had to be contained by the long black body preceding it.

These patterns provide a very useful tool in predicting market changes and direction. Candlestick charting offers farmers a reliable forecasting tool for knowing when to sell their grain and for purchasing their feed grain requirements. 

Join me online for an audiovisual presentation 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 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 for more grain marketing ideas and educational tools, or call us toll free at 1-888-274-3138 for a free consultation.

* – Editor’s note: AGCanada.com readers can click HERE for a version of this article that includes the referenced chart.

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