*All data is current as of the close 12.31.2020
There are two markets in the commodity space that are incredibly undervalued in comparison to their closest peers: Platinum and Minneapolis Hard Red Spring Wheat (HRS). I believe these extreme conditions could provide some heavily skewed risk/reward opportunities in the coming months.
For the moment I will focus on the latter, comparing HRS Wheat to the more versatile Chicago Soft Red Winter (SRW) varietal, by looking at a few ratio charts and comparing current price levels.
Though I will take a purely technical approach presenting the charts below, I want to provide a link to the US Wheat Associates webpage. It provides information on the growing regions, planting seasons, uses, and a host of other interesting data regarding the different wheat classes. You can check it out here.
First, let’s look at a ratio chart of Mpls. Wheat versus Chi. Wheat going back to the late 1960’s. The ratio line is currently testing historical lows that acted as support in ’73, ’79, ’93, and ’07.
If Mpls. Wheat were to begin to outperform its alternatives, especially Chi. Wheat, it would be logical for that to happen at current levels.
How does Mpls. Wheat react on an absolute basis when its value relative to Chi. Wheat reaches such low levels?
It tends to bottom.
The chart below posits Mpls. Wheat relative to Chi. Wheat, next to spot Mpls. Wheat prices over the past 20 years. The two lines look very similar, bottoming and topping together. This suggests an upturn in the ratio chart would be accompanied by an increase in Mpls. Wheat prices.
So, with the Minneapolis/Chicago Wheat ratio at historical lows, and a reversal in this ratio carrying bullish implications for Mpls. Wheat on an absolute basis, let’s zoom in to see if there is any other information that can be gleaned from this ratio.
There appears to be a possible bullish divergence in the 14-period RSI. Like any indicator, the RSI flashes false signals all the time. However, when absolute or relative prices are testing important levels, like historical areas of support/resistance or confluence zones, the information provided by our indicators gains credence.
I believe this currently applies to the ratio chart below, and that the bullish divergence in momentum signals a possible bottom.
Finally, let’s turn to the weekly and daily charts of Mpls. Wheat futures. Both charts depict massive bases.
The weekly chart is developing a possible double bottom. The present price of Mpls. Wheat is almost $2 away from a breakout level around 795^0. It would reason that there should be plenty of opportunity to enter this trade as the bottom develops, but if 2017 proves an appropriate analog that trade may already be underway.
The daily chart shows a recently completed rounding bottom pattern with a breakout level around 585^0. A retest of this level or any short-duration flag or pennant could provide an entry to the market.
There is a lot of evidence out there supporting the possibility of higher commodity prices: strength in the Commodity/Bond ratio, a weakening USD, burgeoning outperformance by emerging markets, and of course major breakouts in commodities.
When we focus in on the commodity space we find some extreme readings within certain areas. The price of Minneapolis Wheat relative to Chicago Wheat is a great example that provides significant evidence of a favorable risk/reward opportunity.
Mpls. Wheat relative to Chi. Wheat is at an area of historical support , dating back to the early 1970's.
A bullish divergence in momentum signals a possible bottom in the Mpls/Chi. Wheat ratio.
Minneapolis Wheat futures tend to bottom along with the Mpls./Chi. Wheat ratio.
Bottoming patterns are present on both the weekly and daily charts of Mpls. Wheat futures.
Within the broader context of the overall market environment, I think the above evidence adds up to a great play in the grain market.
Along the same lines, I will cover Platinum's relationship with Gold in a post tomorrow.
Thanks for reading! If you have any questions or comments, please feel free to contact me at ianculley@culleycharts.com
DISCLAIMER: All information and opinions expressed by Culley Charts are strictly that, and should not be construed as investment advice. Market participation comes with inherent risk, and the responsibility of managing this risk lies solely with each individual investor.
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