A pennant has been waving over the oat futures market, but it’s not a signal producers will want to salute.
It’s a technical indicator that suggests oat prices likely have further to fall.
Oat market analyst Randy Strychar spotted the pennant formation and highlighted it in a Jan. 25 Oat Insight market report. Through the next week the formation followed its expected development and may have reached the breakout point.
“It just jumped right out at me, it’s so clear,” said Strychar, who focuses on fundamental analysis but watches for giveway technical indicators.
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A pennant formation is a long, thin triangular trading band that sometimes develops after a sustained move in one direction. The triangular bit looks like the thin, tapering pennants that fly from ships, hence the name. The long, straightish trend that leads to the pennant looks like a flagpole and is referred to as the pole.
A pennant is known as a continuation pattern, which means it interrupts a continuing trend. Once the interruption ends, the trend tends to resume.
This oat pennant, which may now be complete if breaks on Jan. 30 and Feb. 2 to the downside hold, began forming in November and early December, as oat prices began moving sideways between $2.50 and $1.91 on the Chicago March contract.
As time went by, the band grew thinner with prices eventually moving only a penny or two per day as the narrowing lines of highs and lows led toward the kind of crossover that tends to cause an explosive end to the pattern.
Technical analysis does not require an explanation for why a chart pattern occurs or why its resolution tends to be predictable, but Strychar senses that the price consolidation that occurs within a pennant is the result of traders laying back after a major market move and reassessing their needs before returning to the market.
“The trading range starts narrowing because people are trying to decide what they want to do,” said Strychar.
“All of a sudden – bang. It’ll break right out of it.”
Strychar noticed that trading in oat futures fell from about 1,000 contracts per day during the slump to 300 to 400. With little liquidity in the pit, when a major player finally decides to move, the explosive result for prices makes sense.
“When you get this kind of low volumes, if someone comes in with 100 contracts, or even 50, you can really move that market in the blink of an eye,” said Strychar.
What might be happening now is that the commodity funds are rolling their positions forward out of the March contract, Strychar said.
Technical indicators don’t invariably predict the future. Their interpretation is challenging and requires skill and training. And different schools of technical analysis look at the same formations in different ways.
For instance, a formation seen as a pennant, and therefore almost certainly a continuation pattern, in traditional technical analysis could be seen as a contracting triangle in Elliott Wave analysis, something that would be expected to produce an explosive breakout, but not necessarily a continuation of the previous trend, although that would be the most likely outcome.
Strychar, while flagging this pennant, is not committed to seeing it as a continuation pattern.
“Sometimes when these things break out they’ll bounce violently one way or the other and you can’t predict it,” he said.
