By Todd Hultman
There's a song on Neil Young's Prairie Wind album that hit home with me the first time I heard it, "This Old Guitar." I don't own a guitar, but there was something especially sweet about hearing Neil sing about his old friend:
"It's been up and down the country roads
"It's brought a tear and a smile
"It's seen its share of dreams and hopes
"And never went out of style"*
Being a grain analyst is nowhere near as cool as being a musician and, at the risk of sounding geeky, I have to admit that my equivalent of Neil's old guitar is a specific trend indicator, the 50-day moving average. It too has been up and down the country roads and has stood the test of time. There are many different ways to define a trend and none of them are perfect, but few on my journey have been as consistently reliable as the 50-day moving average.
I know many are skeptical of technical indicators as if they were some kind of voodoo, and I understand there is plenty of chart quackery passed off as "technical analysis." My experience, however, is that all methods have pros and cons, including the fundamental approach.
When looking at markets, understanding the fundamental factors of supply and demand is always a good place to start and, when markets are strongly bullish or bearish, fundamentals alone can take you a long way. However, relying exclusively on fundamentals eventually leads to problems. First, fundamental data is always based on the past and there are no guarantees that the numbers are right. Second, fundamental information is often mixed and not easily labeled bullish or bearish. For example, wheat supplies are plentiful this year, but quality is suspect. A good technical indicator brings clarity to confusing situations.
"It's been a messenger in times of trouble
In times of hope and fear
When I get drunk and seeing double
It jumps behind the wheel and steers."*
I challenge anyone to show me an economist who called the market for Chicago wheat as well as the 50-day moving average did in 2014. Prices started the year below the 50-day average, coming off of a successful year of corn and wheat production in 2013, but then closed above the 50-day average on Feb. 18 at $6.41 as events heated up in Ukraine. Would things turn serious in Ukraine or was this a fleeting worry? Analysts could not say for sure, myself included, but after one brief hiccup on Feb. 27, prices were back above the average and climbing higher.
The rally in wheat did not end until May 15 when prices dropped back below the 50-day moving average at $7.17. Wanting to be sure that wheat was headed lower, I waited until May 23 to announce in DTN's Closing Market Video that the wheat market had turned bearish. From there, prices quickly headed south as the Northern Hemisphere experienced uncommonly good growing weather through the summer.
After prices fell below $5 a bushel in late September, commercials added to their long positions, which eventually helped turn prices higher. March Chicago wheat closed back above the 50-day moving average on Oct. 22 at $5.36 and has traded above the average ever since. This latest move higher has taken prices to $6.19 as of Monday, helped by concerns of possible winter kill in the U.S. and talk that Russia may limit exports -- two bullish factors that were not even on the radar on late-October.
The fundamental outlook for wheat is currently unclear, but fortunately we have more market clues to consider. In addition to prices trading above the 50-day average, there are also signs of increased commercial demand in futures spreads as mentioned in DTN's Closing Market Video on Nov. 12 and an upturn in November's monthly stochastic. It is hard to say how far the uptrend will last. I, for one, will be keeping an eye on the 50-day moving average, now at $5.49. Take it away Neil and Emmylou ...
"This old guitar ain't mine to keep
It's mine to play for a while."*
* Prairie Wind, produced by Neil Young and Ben Keith, 2005.
Todd Hultman can be reached at firstname.lastname@example.org
Follow Todd Hultman on Twitter @ToddHultman1
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