Wheat charts reveal enticing pattern

Analyst says an emerging pattern he has seen only two times before could push nearby futures prices to $8.71 per bu.

Depending on how you read the futures market tea leaves, wheat is either poised to go on a heck of a bull ride or about to fall off and get trampled.

Ken Shaleen, analyst with ChartWatch International Futures Research, thinks Chicago wheat is poised for a bull run that will push nearby futures prices to $8.71 per bushel.

Darin Newsom, president of Darin Newsom Analysis, believes the wheat market is topping out and will soon be heading down.

The polar opposite outlooks from the two analysts are based on differing patterns they are seeing in the monthly Chicago wheat futures charts.

On a recent Allendale Market Talk podcast, Shaleen said he has been analyzing charts for 50 years and recognizes a pattern emerging that he has seen two times before in his career.

The first time was when he got a job as a phone clerk at the Chicago Board of Trade in the early-1970s.

In his spare time he visited the CBOT library and studied old charts. He noticed a pattern known as a “head and shoulders bottom” that formed in 1946 and 1947.

Wheat prices skyrocketed shortly after coming out from that bottom.

He saw a similar pattern forming in the futures market in the late-1960s and early-1970s and decided to tell an experienced broker about this observation.

“He said, ‘hey kid, you’ve been down on the floor for two months and you’re forecasting wheat prices we haven’t seen since 1947?’ ”

Turns out he was right. The Russians cornered the wheat market, pushing prices above $6 per bu. in 1974, up from about $1.50 per bu. a couple of years earlier.

Shaleen is adamant that he is once again witnessing a head and shoulders bottom in today’s market.

If the December wheat contract stays strong and closes above $5.78 per bu. at the end of October ,that will be a sign that the nearby futures contract is heading to $8.71.

In fact, the charts tell him that the wheat market will go on a run that eventually takes out the 2008 high of $13.34.

Newsom does not see the same pattern that Shaleen is seeing in the charts.

“If there is a head and shoulders (bottom), it is really, really vague,” said the former DTN analyst.

Using that “really vague” head and shoulders bottom, Newsom computes a target price of $8 per bu. for nearby Chicago wheat futures, which would test the highs set in the summer of 2015.

But that isn’t the prevalent pattern he is seeing in the charts.

“I’m at the other end of the spectrum,” he said.

Newsom said there was a major two-month reversal in April and May of 2019 that led to a five-wave uptrend in the market. Commodity markets tend to move up in five waves and down in three waves.

“We’re in wave five right now,” he said.

“I think we’re probably in the final throes of the uptrend here in wheat.”

He believes the wheat market is “overbought” and is destined for a downturn mainly because the U.S. dollar index is poised to go on a long-term bullish trend, making U.S. wheat less attractive in foreign markets.

“There is no fundamental reason for wheat to push higher at this point,” said Newsom.

“We don’t have a great deal of demand and it’s overpriced.”

He believes U.S. wheat is going to have a tough time competing in export markets and with corn trading $2 per bu. lower there will be little demand in the domestic feed market.

However, Shaleen keeps seeing bullish signs in the market. During his Oct. 13 podcast he noted that the previous day’s low for Chicago wheat was $5.87, which was identical to the high posted on Sept. 30.

“The classic definition of underlying support is a former price high,” he said.

“I’d be long right now.”

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