Sunday 19 December 10
Wheat?! This is a stock forum. Why wheat?
This is a technical blog. The analysis here applies to any underlying
stock or commodity. When reading, substitute your favorite stock, and
the importance of what is presented still holds. Read on...
One is always scanning charts, looking for clues to a pending move
or a specific set-up. Wheat caught our attention, once again. When
considering candidates for a move, it is best to start an analysis with
a weekly chart. We start with a monthly because it better captures
the story from the beginning, and it leads to viewing the lower time
frames from this context.
A few things stand out on this chart over the past six months. In July,
Wheat had a surprising move to the upside, and it carried over in
August. August did not hold the strength, however, for price closed on
the low end of the bar, erasing all the gains for that month.
There is a lot going on that relates back to the highs in late 2008 and
mid-2009 which forms an area of resistance. A brief digression is
needed here to inform anyone viewing a chart that resistance and
support are areas, not specific prices. We typically draw a horizontal
line to depict both, for ease, but it would be more accurate to draw
a wavy line to reflect the highs/lows, if only computers were more
accommodating. The line we drew slants down from the 2008 high
to the 2009 high, capturing the resistance, and it then kind of goes
horizontal for the latter half of 2010.
July 2010 became a pivot month. The high stopped at resistance,
but continued higher in August. As we all know, previous resistance,
once broken, becomes support, just as previous support, once broken,
become resistance. So the continuation of the 2008-2009 resistance
line has now become support in the last six months.
Now, back to a lot going on. The failure of August to hold its gains
looked like it would lead to more downside, at the time, but what
happened? There was none. That was an important message from
the market. Look at September, 4th bar from the end. It was an
inside month with a low end close. The low end close tells us that
sellers were in control. Well, was that not the same message from
August? Instead a continuation down, after two weak months, it led
to a trading range, starting from August.
What makes this interesting is that it has developed on top of the late
2008-2009 trading range. Anytime a trading range develops atop
another, it is an indication of strength. From the apparent weakness
of August/September comes strength. It reinforces the message of
the market mentioned above.
The next important message comes in November. We have the
highest volume of all the months. Remember, volume is the energy
that drives a market. Let us add that any time you see a large volume
increase, it is usually a sign of a transfer from weak hands to strong,
or strong to weak, depending on the condition of the market. Here,
we see the volume accompanied a wide range bar down with a weak
close. Additionally, the previous three months' support was broken.
Very strong volume, poor close, support broken...sellers have the
buyers on the run. Or so it would seem.
December followed, not with continued weakness, and on even with
lower volume, typical of December, price has rallied ABOVE the high
volume down bar of November. All of that energy expended to the
downside has been overcome. Why?
Strong hands were buying every possible contract that weak hands
were selling. There is the transfer, and we now know Wheat went
into strong hands because price has since rallied to new recent highs,
trapping all the short sellers, and eventually forcing those who
liquidated their long positions to now have to buy them back at much
higher levels. For smart money, this is like shooting fish in a barrel
and a great example of how market operators work.
This is the context we present to delve into and give color to the lower
time frames. Onward...
You can see how the resistance line from above takes its turn higher
after July broke above it. Once it became apparent that the August
low was holding, the wide range tells us to expect a trading affair
within the confines of that bar, which is exactly how it developed.
What we want to focus on here are the last six bars. The sixth bar
from the end is when November began its high volume drive to the
downside. The fifth bar from the end is an important tell. Note how
small the range was for that week and the position of the close. The
smallness of the range tells us that buyers stepped up and stopped
the downside momentum, cold. The close was off the low, telling us
buyers were present. Volume was still high, and this is an example
of the art or chart reading instead of a mechanical interpretation.
We can begin to suspect that these two weeks of selling were the
efforts of smart money to scare longs to sell before the bottom falls
out. Smart money was buying all the way down.
The fourth bar from the end is yet another clue. Anytime you see
that tiny a range after a move, you can almost be certain it is the calm
before the ensuing move, and ensue Wheat did in a strong rally up,
leaving behind all the longs who sold out and trapping those who went
short. Classic market activity.
In many instances, the conclusion to be drawn from observing
developing market activity is clear only after the fact. The smaller
range after the large sell-off was a red flag, but its total implication
that smart money was acting in such a manner was apparent after
the ensuing rally. There could have been a weak rally that failed,
as a test of the break to lead to more downside, and that was a
strong possibility. It was the rally, instead, that proved the
conclusion, after the fact.
Unfortunately, there is not storybook ending to these observations.
Last week's performance leaves behind a small bar with a mid-range
close...showing a lack of demand, and just above the failed highs of
the smaller trading range of the past several weeks. Once again, we
need more information to tell us if Wheat is ready to move or remain
Does the daily help on this read?
Yes, and no. Let us start with the lines that capture the swing highs
and lows since the August failure, already covered. Let us go right to
the end. From the last swing high, price has been in a countermove
down, lasting 8 trading days. This is a second degree correction. A
first degree correction lasts one to three days, sometimes up to five.
However, that is when price is trending up, and Wheat is obviously
in a trading range and not trending, so the second degree
countermove is not so much a sign of a weaker move down. In fact,
quite the contrary.
Of all of the swing moves down, this last one has been the weakest.
It is the only correction that has not retraced all of the preceding rally,
which is a sign of strength, as we have been mentioning from the
higher time frames. Back to that low in November, just for a moment.
It was the lowest low of the trading range, as we pointed out on the
monthly chart...and this is an example of how context is important, and
how it should flow from one time frame to an other, as it appears to be
doing in the way we present it.
November was a failed probe to the downside. It made new lows but
found all the sellers had been exhausted, and there were no more
stops under support. We started this observation on the weekly
chart, and interrupted the daily analysis to show HOW it happened
on this lower time frame, and why it can turn seeming weakness into
This last swing down stopped on the 8th trading day and formed
another failed probe which shows up on a 60 minute chart, not shown.
Another important aspect is that the decline stopped well above the
50% retracement level of the November high/low, around 733. In a
trending market, anytime a correction holds a half-way retracement,
it is an indication of strength. Remember, Wheat is not in a trend. It
is in a trading range, so to hold well above a 50% correction within a
trading range can only be attributed to buyers supporting the market,
aka a sign of strength.
We see Wheat as forming near the last stages of the current trading
range, preparing to move. One could wait for a breakout above 811,
but the risks can be high, depending upon the last swing low, which is
where a legitimate stop would be placed. We chose, instead, to buy
at what can be called a danger point. That is where price is at a
critical area; it can fail, or not. If it fails, buying so close to the
"danger point" entails a smaller risk. If it works, it leads to an
advantageous edge, position-wise.
We bought March Wheat on Friday, 755.5, for all of the above reasons.