If you don’t think the failing euro doesn’t affect your bottom line, think again. Since the end of November 2009, the euro has lost about 12.5 per cent of its value relative to the U. S. dollar index and 15 per cent to the Canadian dollar – and this devaluation caused North American wheat to become uncompetitively priced.
This is one of the reasons North American wheat values have declined $25-$30 per tonne since the beginning of January 2010. This and burdensome world wheat stocks are the reasons May 2010 wheat futures contracts at all three U. S. exchanges are continuing to post new contract lows.
It’s been four months since the euro peaked and investors are only now learning the reason for its devaluation. The deficit in Greece is sending shock-waves throughout the financial community.
The reason I find charting and technical analysis so important is the price action and prevailing chart patterns routinely forewarn investors and farmers alike of a change in trend long before the fundamental news is evident. Unfortunately, by the time the news becomes mainstream, the opportunity to hedge against these risks is usually long gone.
The two-month reversal that materialized at the recent high in December 2009 was an indication the euro was about to turn back down. The additional weakness seen in the weeks that followed added validity to this reversal pattern.
A two-month reversal begins to develop when the market advances to new highs and closes very strong at or near the high of the month. The following month, prices open unchanged to slightly higher, but can’t make additional upside progress. Selling picks up early in the month to stymie the advance and prices begin to erode. By month’s end, the market drops to around the preceding month’s lows and closes at or near that level.
Market psychology: The two-month reversal is a snapshot of a 180-degree turn in sentiment. On the first month, the longs are comfortable and confident, as the market’s strong performance provides encouragement and reinforces the expectation of greater profits. Longs are traders who have purchased futures contracts in anticipation of higher prices.
The second month’s activity is psychologically damaging. It is a complete turnaround from the preceding month and serves to destroy or at least shake the confidence of many who are still long the market. The immediate outlook for prices is abruptly put in question. Longs respond to weakening prices by exiting the market. Some sell to protect profits and others sell to stop losses.
This increased selling forces prices to break below a line of support (A) and in turn changes the trend from up to down. Once a trend begins in earnest, it has a high tendency to persist.
Thus, a properly constructed trendline may be touched several times by the fluctuating market during the course of a big move without being penetrated. The longer the trendline continues without being penetrated, the more significant becomes its eventual penetration as an indicator of trend change.
The penetration of a trendline (A) may be part of, or may coincide with, the completion of a classic reversal formation such as the two-month reversal. When this occurs it is a particularly strong indication of a trend change.
The euro is technically oversold on the daily charts, so it could rebound when EU leaders announce a bailout plan for Greece. However, we would expect the “dead cat bounce” to fizzle, as the economic instability is far from over. Portugal’s credit rating was downgraded this past week and the debt-ridden economies of Italy, Spain and Ireland also have investors worried about defaults.
Join me online at www.Ag-Chieve.ca/cooperator/foran audiovisual presentation about this article and chart.
David Drozd is president and senior market analyst for
Winnipeg based Ag-Chieve Corp. The opinions expressed
are those of the writer and are solely intended to assist readers
with a better understanding of technical analysis in the
markets influencing agriculture. The information contained herein is deemed to be from
sources that are reliable, but its accuracy cannot be guaranteed. Visit us online at www.ag-chieve.ca/cooperator/for
more grain-marketing ideas and educational tools, or call us
toll free at 1-888-274-3138 for a free consultation.