Ever since wheat futures (CBT.W) made its contract low on Dec. 5 ($4.71 per bushel), wheat has made higher intra-day highs for eight straight days. This is quite impressive, because many commodities are being weighed down by deflationary pressures throughout the world economy. The poster child is, of course, crude oil, which yesterday poked its head under $40 per barrel for the first time in four years. In addition, copper prices also hit their lowest levels since 2004.
While we are not super impressed with wheat fundamentals, we have to admit that a continuation of this extremely cold weather could hurt the developing crop, and the suddenly weak U.S. dollar is supportive of wheat prices. Furthermore, substantially higher gold prices are possibly signaling higher inflation ahead. So we have to ask, is this just a bear market rally, or should we be jumping on a new bull express?
Q: What has happened in the past when the high in March wheat futures is higher than its previous high for eight days in a row?
A: The historical record has been quite bullish, with futures rallying 80% to 90% of the time, one to four weeks later. Note that average gains have been as much as four times higher than average losses.
According to the nine previous occurrences of this event, March wheat has shown a somewhat bullish edge that peaks 18 trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date (Wednesday, Dec. 17, 2008) is Wednesday, Jan. 14, 2009. Wheat rallies in 78% of the cases (7 of 9) by an average of 9.3% relative to the close on the event date. The average of the two declines is 2.3%. The overall return of the nine cases is 6.7%, which, based on the close of March wheat on the event date ($5.57-4), provides a target price of $5.94-6.
For more Market History go to www.markethistory.com
Robert J. O'Brien Jr. is President of County Cork, LLC, a Commodity Trading Advisor (CTA) based in Skokie, Illinois.
