The wheat market rallied $1 per bushel in the two-week period leading up to the June 30, 2015 USDA and Statistics Canada acreage reports. But it was all downhill shortly after the July long weekend.
This timely rally provided producers with an opportunity to price remaining old-crop wheat and move forward on new-crop sales.
From a technical perspective the wheat futures market pushed through overhead resistance and triggered buy stops that propelled the market higher.
From a fundamental standpoint the market rally was weather related. The drought was intensifying in Alberta and Saskatchewan at a time U.S. winter wheat producers were battling excess moisture at harvest. The market was also up on position squaring ahead of the highly anticipated June 30 acreage reports in Canada and the United States.
In this scenario, the news is bullish, so there is difficulty digesting all the information to determine when to make a sale before the market turns back down. After all, every seller wants to avoid the valleys and needs to sell at or near the highs.
This is when an understanding of charting and technical analysis proves to be extremely beneficial. Technical analysis has repeatedly proven its ability to cut through the news (noise) by way of identifying reversal patterns at market highs. This is important to know, as it can and does provide a signal of a change in trend amidst all the bullish news.
It is important to watch the typical bar chart, along with a study of the candlestick charts because candlestick charting provides an insight into market activity that is not readily apparent with the conventional bar charts.
Virtually all modern-day technical analysis used in conjunction with bar charting (e.g. trendline analysis, pattern recognition, stochastics, RSI, etc.) can be applied in the exact same way using candlesticks, plus having additional merits.
Candlestick charts allow the viewer to spot technical strength and/or weakness at a glance by highlighting the relationship between the open and the close for each line (candle). If the close is above the open, then the real body will be white. When the real body is black, this simply means the close was below the open.
The candlestick method gives deeper insight by utilizing numerous interpretations for intra-line activity. Therefore, the user has a timely advantage in spotting key market turning points for all time frames.
I’ve illustrated the Harami in the accompanying candlestick chart. This reversal pattern developed at the recent market high.
A harami suggests a waning in momentum and a possible trend change. At a market high, the small black body of the harami must be contained by the white real body preceding it. At a market low, the small white body of the harami must be contained by the black real body preceding it.
The Japanese method of charting is called candlestick because the individual lines resemble candles. The line shows the open, high, low and close. The thick part or candle is called the real body. It highlights the range between the open and close. The lines above and below the real body represent the high and low ranges for the period and are called shadows.
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. As illustrated in the accompanying chart, six of the seven candles in recent weeks were black.
Wheat producers who recognized the harami at the top of the market rally sold old- and new-crop wheat near the high, so as to avoid selling in the valley.
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