- The December contracts of Chicago (SRW), Kansas City (HRW), and Minneapolis (HRS) wheat futures markets all posted bullish technical reversal patterns on their respective weekly charts at Friday's close.
- The Barchart Cost of Carry tables show Kansas City's spreads are bullish, Minneapolis spreads are neutral, and Chicago spreads remain incredibly bearish.
- In the end we have Newsom's Market Rule #6 that tells us, “Fundamentals win in the end”.
Heading into the weekend, the best quote I can come up with to describe the wheat sector comes from the Winston Churchill’s comments on Russia, “It’s a riddle, wrapped in a mystery, inside an enigma”. There is an obvious connection between the topics of Russia and the wheat sector, though I’m not on the same bandwagon as those who still talk about how bullish the latter is fundamentally since Russia invaded its neighbor and sovereign country Ukraine. I’m not going to get into the politics, that’s a subject for a different forum, but it is likely in the back of the minds of traders as they make their way to local watering holes this Friday afternoon.
What I want to focus on in this piece is the difference between technical and fundamental analysis in all three markets. To set the stage, the latest round of CFTC Commitments of Traders report (legacy, futures only) showed noncommercial interests held net-short futures position in all three markets: 46,410 contracts (Chicago SRW), 10,550 contracts (Kansas City HRW), and 8,430 contracts (Minneapolis HRS). Recall these positions were as of this past Tuesday, September 5.
Fast forward to Friday’s close and we see December Chicago (ZWZ23) closed 0.25 cent higher for the week, completing a bullish technical spike reversal[i]. Similarly, December Kansas City (KEZ23) finished 9.25 cents higher for the week, also completing a bullish spike reversal but with more confidence. Lastly, December Minneapolis (MWZ23) was up 11.0 cents from the previous week’s settlement, once again completing a bullish spike reversal. Reduced to the simplest denominator, new intermediate-term uptrends on the weekly charts would be driven by a round of noncommercial short-covering. But is there any incentive for funds to fear being short the various wheat markets? Let’s find out.
To begin with, let’s apply Newsom’s Market Rule #6: Fundamentals win in the end. When I talk about fundamentals, I’m not talking about the imaginary supply and demand numbers released by USDA each month, but rather our reads on real fundamentals: Basis and futures spreads. For this discussion, our starting point is national average basis for all three wheat markets is weak, running well below previous 5-year lows[ii]. Therefore, to differentiate between the three markets we’ll compare their respective Barchart Cost of Carry tables[iii].
At Friday’s close the Kansas City December-March futures spread covered 12% calculated full commercial carry (cfcc) while the March-May covered roughly 11.5%. Though I don’t believe in the concept of marketing years, the initial 2024-2025 July-September spread covered 20% cfcc. The bottom line is Kansas City futures spreads remain bullish. The Minneapolis December-March spread covered 47% cfcc while the March-May was covering 39%. I could go out to the May-July, though we start to run into trade volume and open interest issues. Based on the two 2023-2024 spreads we can classify spring wheat fundamentals as neutral.
Then there’s Chicago, where the September-December still covered 110% cfcc, the Dec-March nearly 99%, and the March-May covering 94.5% cfcc. This is about as bearish a fundamental situation as one can imagine and has triggered the CME’s higher maximum storage rate to go into effect on September 19.
Here’s the question: Knowing Newsom's Rule #6, can we believe the technical reversal patterns we see on weekly charts? The first premise of technical analysis is, “Market action discounts everything”[iv]. This means anything that can be known by traders is priced into the market, even if we don’t know what all that information is[v]. If we believe this premise then we should believe what we see on technical charts. I’ve been an analyst for a long time, and have studied countless technical charts, but I can’t say with conviction I believe what I see at this week’s close.
Why? Because wheat is known for creating head-fakes on its charts. In other words, it completes patterns to suck traders in on the idea market action discounts everything, only to immediately reverse course. Wheat is notorious for this type of activity. My other concern is Chicago is the most heavily traded wheat futures market in the world, and in this case, has some of the most bearish real fundamentals I’ve seen in over 3 decades of studying markets. Even with Kansas City’s fundamentals somewhat bullish (basis, after all, is weak) and Minneapolis neutral-to-bearish, buying interest in the hard red markets could be influenced by the incredibly bearish fundamentals of soft red winter wheat.
With all this in mind, we are left with some important questions to ponder over the coming days and weeks:
- Do we believe what we see on the charts, or the Chicago Cost of Carry table?
- Can we have more faith in what we see in Kansas City given its futures spreads are still bullish, or does spillover bearish fundamentals from Chicago create too much weight?
- As for Minneapolis, can this bullish technical pattern withstand possible late harvest selling?
I don’t have good answers for any of the above. What I do know is the wheat sector shouldn’t grow boring any time soon.
[i] A bullish spike reversal is when a contract makes a new low for whatever timeframe being studied before closing that timeframe higher. Of the four different reversal patterns I look for, spike patterns are not the most reliable.
[ii] We need to keep in mind what a friend of mine used to present on, Grains’ Golden Rule: First basis, then futures spreads, then futures.
[iii] You can find these on your Barchart system. For simplicity, decades ago when I was a grain merchandiser in central Kansas I broke cost of carry into thirds with 33% or less considered bullish, 34% to 66% various degrees of neutral, and 67% or more considered bearish.
[iv] From Technical Analysis of the Futures Market by John J. Murphy, 1986 ed., pg. 2
[v] The basis for Newsom’s Market Rule #5: It’s the what, not the why.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
