MarketsFarm — Canola futures posted sharp losses over the past week, with the May contract touching its weakest level in six months. While damage was done from a chart standpoint, there are technical signs that a recovery is possible.
RSI
The relative strength index (RSI) is a technical indicator that provides insight into whether a contract is overbought or oversold. Calculated using average price changes, the RSI ranges from zero to 100, with a reading above 70 typically deemed as overbought, and below 30 as oversold.
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Looking at the May canola chart, the each of the past three times the RSI has dipped below 30 (the red dips on the chart) have been followed by a correction higher. While each subsequent correction has been smaller than the past, canola typically does not stay oversold for long.
20-day average
The 20-day moving average (the blue line on the chart) is a chart indicator showing the average closing price over the previous 20 sessions. Moving averages can be calculated using any number of timeframes, but the 20-day is a good short-term signal. It can act as both a floor or ceiling for futures markets, with the current state of the May contract well below the average a sign that speculators could be looking to bring prices back in line with the average.
Commitments of Traders
Much of the recent selloff in canola was thought to be tied to fund traders adding to short positions, with that kind of speculative activity often resulting in a snowball effect. However, a ‘cyber-related incident’ has caused delays in releasing the U.S. Commodity Futures Trading Commission (CFTC) weekly Commitments of Traders report for over a month.
The report details exactly who is holding what kind of a position – long or short – in the various markets. That info can provide great insight into technical trends in the futures markets but is unknown for now. The issue was apparently resolved, but a backlog of data remains to be worked through before the trade will once again have more current information on what’s happening behind the scenes.
— Phil Franz-Warkentin is an associate editor/analyst with MarketsFarm in Winnipeg.
