Triangle Trouble for Wheat Futures

12/03/02 10:24:40 AM

by David Penn

A descending triangle in December wheat may signal the break for which the bears have awaited ...

Security: WZ2, WZ02
Position: N/A

I've made a few recent noises about the apparent top in grain futures (see my "1-2-3 Reversals and Commodities," Traders.com Advantage, November 26, 2002). Recent price action in December wheat seems to underscore the bearishness of these futures, particularly since early September. In looking at the potential downside in December wheat, I noted a descending triangle over the month of November -- one that points to declines in December wheat as being more likely than renewed advances.

First, the case for the top in December wheat is predicated on the price spike in early September, a spike that took December wheat futures above 437. Prices retreated sharply after this point, spending the rest of September in decline and putting in an intermediate bottom in early October around 360. This decline was the first sign of major trouble for December wheat. The second sign came as December wheat rallied into mid-October. When prices consolidated between 420 and 395, there was perhaps an equal chance of December wheat futures continuing their rally as resuming their downtrend. But as November arrived, December wheat began to decline again, suggesting that the risks had definitely shifted against the bulls--even if December wheat was not, at this point, an obvious short.

This descending triangle may set the stage for December wheat's next leg down.

Graphic provided by: TradeStation.

Second, the November declines set the stage for the descending triangle. The case for the descending triangle comes on the back of the steadily lowering highs December wheat has made since early in November. As for the horizontal support line, we can spot support developing along the lows of November 13th, the 21st and on December 2nd. This support is about ten points above the correction low in October, which was made as December wheat fell from its contract highs just north of 437 early in September. Nevertheless, this support seems significant and, if broken, will suggest that strong technical damage has been inflicted.

What is the downside of a break beneath support at the 370 level? Given a formation size of about 396, a downside break in December wheat's descending triangle could take the contract down 25 points or more to the 345 level. This area actually might provide some support, primarily in the form of the August correction lows of about 344 4/8.

David Penn

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

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DESCENDING TRIANGLES

Triangle Trouble for Wheat Futures

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