From the Desk of Ian Culley @IanCulley
The increased selling pressure across grain markets might not be on your radar.
But pay close attention: The soybean complex, corn, and wheat are edging toward their respective year-to-date lows as demand wanes.
Even if you don’t trade these ag contracts, fresh multi-month lows – especially in wheat – carry broad implications for equities and cyclical assets. (Hint: It has to do with crude oil.)
That’s why I’m on high alert for a potential breakdown in Chicago wheat…
Wheat has been in a strong downtrend since its March 2022 peak, entering a bearish momentum regime last summer.
Notice it's currently carving out a potential multi-month reversal pattern below a significant polarity zone.
But the bulls have their work cut out for them, as the bearish momentum profile suggests sellers are still in control of the market.
When I take a closer look, I see a possible inverted head and shoulders pattern on the verge of failing.
And based on today’s session, it may even trigger a sell signal before the close.
An upside resolution above 724’0 turns my outlook higher, as I outlined earlier in the year.
On the flip side, the next leg lower likely accelerates if wheat undercuts the right shoulder closing low of 667’2.
If and when wheat takes out that level, I like it short with a measured downside target at approximately 600’0 (which coincides with the 2021 lows).
I love trading tight continuation patterns like this. But further selling pressure in wheat carries implications beyond a simple trade setup.
It all comes down to crude oil.
Check out crude oil overlaid with Chicago wheat futures:
These two markets have a strong tendency to trend in the same direction. Most importantly, they peak and trough together at major turning points.
Both topped last year during the first half. And both have trended lower since.
A fresh leg lower for wheat implies the same for crude. It doesn’t mean crude will follow, of course, but historically that’s often the case.
I expect cyclical assets, including commodities, their related stocks, and value-oriented sectors, to catch lower in an environment where demand dwindles for crude (with the exception of gold).
As funny as it may sound, it all likely starts with a downside resolution in wheat.
It doesn’t matter if you’re a commodity trader or a long-term investor. Keep wheat futures top of mind in the coming days and weeks – because today’s selling pressure across grain markets could spill over into equities tomorrow.
Stay tuned.
COT Heatmap Highlights
- Commercial hedgers begin to unwind their record-long position in palladium, dropping 1,400 contracts last week.
- Commercials tacked on additional long exposure to lean hogs, hitting their largest position in three years.
- And commercials added another 4,000 contracts to their long position in Chicago wheat, falling within two percent of a three-year extreme.
Click here to download the All Star Charts COT Heatmap.
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