The Wheat Diamond

08/08/07 12:19:23 PM

by David Penn

A diamond breakout in September wheat begins another leg higher.

Security: WU7
Position: N/A

Been dying for analysis of the wheat futures market? I wouldn't be surprised if so. The last time wheat futures were discussed in any length at Traders.com Advantage was an article I wrote back in 2003 about a double top. That call proved incorrect insofar as a brief shallow breakdown only provided a low from which a strong bull market in wheat futures emerged.

So you could say that September wheat and I had a score to settle. This time, in contrast to my bearishness on wheat futures four years ago, a diamond consolidation in an uptrending market has led, unsurprisingly perhaps, to a breakout to the upside.

While not a hard and fast rule, consolidations in trends tend to lead to more trend rather than to reversal. Spotting this diamond pattern developing — and recognizing a general inflationary bias to the commodity markets — I had a fairly easy time anticipating an upside resolution to September wheat's late June–early July consolidation.

FIGURE 1: WHEAT, SEPTEMBER FUTURES, DAILY. The breakout from this diamond pattern set September wheat on a course for a possible test of the $7 level.

Graphic provided by: Prophet Financial, Inc.

The pattern features the requisite pair of parallel lines to provide both support and resistance on the right side of the channel. Diamond patterns are similar in behavior to symmetrical triangles in that breaks from these patterns can move upward or downward. As such, traders and technicians like Thomas Bulkowski, author of Encyclopedia Of Chart Patterns, encourage traders to wait for the market to show its hand with a break before taking a position.

In the case of September wheat shown in Figure 1, the breakout was to the upside, even though the session itself was down and ended up closing back inside the consolidation. The following day was more of the same, only lower. The third day was lower still, though still barely within the upper right resistance boundary of the diamond. The fourth day was a charm, as September wheat broke free from that upper right resistance boundary. Not only that, but the market closed above 640, marking a new multimonth high.

How much more upside might September wheat have? The diamond pattern, minimizing the shadows somewhat, is approximately 60 points at its widest. Adding this number to the value at the breakout point of approximately 620 gives us a projected upside minimum of 680.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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THE DIAMOND

The Wheat Diamond

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