Futures on the move

Commodity futures seek a bottom” explored the idea of keeping an eye on commodities in the New Year for signs certain markets might be emerging from extended consolidations or downtrends. Recent explosive moves in two markets—one that hasn’t done much in a while, and another that’s already done quite a bit—are worth investigating.

First up, crude oil. After rallying more than 50% from last June to January 25 (one day before the stock market made its swing high) and peaking near $67/barrel, March crude oil (CLH8) sold off almost 8% as of yesterday—falling below $61.50, making a lower high, and trading below the two most recent swing lows.

March crude oil (CLH8), 4/20/17 – 2/7/18

Source: OptionsHouse

A retracement of the uptrend may have been in the cards, regardless, but some fundamental factors appear to be pressuring the market, too. After several weeks of declining crude inventories, the past two weeks showed stockpiles shifting to the upside (+6.8 million and +1.9 million barrels, respectively).1 Also, some analysts think renewed US shale oil production could continue to weigh on prices; the U.S. Energy Information Administration (EIA) forecasts an increase in US crude production to an average of 10.59 million barrels per day (bpd) in 2018 and 11.18 million bpd in 2019.2 So, higher prices that encouraged more shale production may ultimately morph into oversupply that could cool prices. And around and around we go.

Like the stock market, crude certainly has the potential to bounce after such a sharp decline, but barring a near-term move above the January highs, traders will likely also be eyeing potential downside opportunities. The November-December trading range is the most conspicuous technical formation of the past several months, making it a possible target in the event a more significant down move unfolds. (BTW, the lower boundary of the range represents a 50% retracement of the June-January uptrend.)

Moving from the oil patch to the farm fields, there’s been some action in wheat and corn futures—markets that have been so quiet for so long traders could be forgiven for wondering if they’d simply closed up shop. Let’s take a look at wheat:

March wheat (ZWH8), 7/10/17 – 2/7/18

Source: OptionsHouse

After a roughly 25% sell-off last July-August, March wheat (ZWH8) spent most of the next five months slowly drifting lower (…and lower) on diminishing volatility. After a sharp two-day downturn in mid-January, prices jumped nearly 11% over the next couple weeks, breaking out above the December highs to their highest level since October. The subsequent test and rebound off that breakout level could have traders wondering whether the market is forming a double-bottom and mounting a genuine uptrend.

Yesterday’s monster up day (up more than 3% intraday) pushed prices to another breakout above the late-January swing high, setting up a test of the September high above $480.

March wheat (ZWH8), 11/8/12 – 2/7/18

Source: OptionsHouse

The recent moves in crude and wheat were big enough that traders likely expect there’s a good chance that both markets will rein in their horns a bit before making their next move. But wide-range days such as these bear watching: Unless they are reversed quickly in the opposite direction, they can indicate increased momentum in their direction.

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1 Econoday. EIA Petroleum Status Report. 2/7/18.

2 Reuters. Oil prices rise on report of decline in U.S. crude stocks. 2/6/18.