Wheat has been a horrible performer over the past 5 years, suffering along with most of the commodity complex.
In the second quarter we witnessed a violent, but short lived rally, only to give it all back and then some, dropping to new 2017 lows.
Negative price performance leads to negative technicals, and the web is full of news stories of ag trading desks throwing in the towel amidst the terrible performance.
Here at 3ptCapital however, in the midst of wide spread bearishness, we are stalking for any signals of a reversal, as "reverse to the mean" rallies offer great R/R setups. This week, we have signs, that a rally is due - Let take a look:
We always start by looking at our baseline actuarial tables to understand standard price distribution - We can then statistically measure how particular setups compare, and if we have an edge.
Since 2006, over 2,983 trading periods, we see that over a 20Trading day interval, the 80th Percentile move is 11up by (10)down and the 70th percentile is 17.75up by (15.75) down - So 11:10 odds in bulls favor. During the past few years, amidst wheat's aweful performance the odds have shifted to 10:11 in bears favor.
1) This week's COT report caught our attention.
Commercial Traders bot over 31k contracts over the past week - On our proprietary scale, this scored 100% on a 18m basis, and 94% on a 5yr basis.
Price distribution shows significant improvement, in bulls favor, when Commerical Trader weekly delta scores 95% or better. Bull:Bear Odds shift to now 3:1.
2) At 3PC we calculate channel bands factoring a volatility and weighting component on a 4/9/23 period basis. When the 9+23 channels' trend are both down, we refer to this setup as "4down". As price has been so weak since July, we now have a weekly "4down" signal.
So trend is clearly down, but paradoxically, price distribution shows significant improvement once this triggers. I suppose the reason is that price tends to ebb and flow, and when it flows in 1 direction so relentlessly, it will snap back in the opposite direction.
We already know baseline odds are 11:10 bulls, going back to 2006. However, when we have a weekly 4down signal, the 80th percentile movements are 20.4up by (6.63) down and 70th is 28.25 by 11. So odds here are now 3:1 bulls.
3) On the weekly charts we see a Hammer/Doji candle formed on heavy volume last week which is a reversal signal. Further our price oscillator has been over sold territory for over 3 months, signaling a movement back to neutral is due.
Wheat has been terribly weak - Too weak, and that leads to price outperformance over the coming 4-5 weeks.
Traders can take advantage of this via call spreads. Exit the position on a weekly close below 410.