20% Upside In Oat Futures

Oat futures are not an asset class that get much attention, but regardless, the weight of evidence suggests that prices are setting up for a swift move to the upside.

Firstly, from a seasonal perspective, we’ve just entered the best four month period of the year for Oat futures. Average returns over the past thirty years have been positive in the months of Sept.-Dec., with both Sept. and Dec. being the best two months of the year, respectively. Additionally, commercial hedgers are maintaining their second largest net long position in history, just marginally below levels seen in early 2009.

This backdrop is extremely bullish for prices over the next few months, so let’s see if the price action is providing us with an equally compelling reason to be involved on the long side.

From the weekly chart we can tell that Oats are clearly in a structural downtrend as prices have created a series of lower highs and lower lows, broken a major uptrend line earlier in the year, and are trading below a downward sloping 200 week moving average. However, prices have recently put in a false breakdown below the April 2015 lows as momentum positively diverged, and are now showing follow through to the upside. Structurally this chart remains broken, but if we get back above the early 2015 closing lows near 233, we can see prices retest the underside of this broken trendline and multi-year support/resistance around 280.

chartOn the daily chart, we can see prices make new lows in late August, but quickly break above the accelerated downtrend line and create a higher low as momentum confirms the move by creating its own higher low. Prices have since spent a week or so consolidating below a confluence of resistance from the downtrend line drawn from the June highs and the previous support level at 233. If prices can break and close above this 233 area, there is a good chance we see a mean reversion toward the 200 day up near 280, which would correspond with resistance on the weekly.

chartOn the hourly we can see prices breaking above the downtrend line from the June highs and consolidating below resistance from the prior low at 233. We can also see that momentum confirmed the higher low in prices and is now in a bullish range. This is all very constructive action, but the bulls main concern remains the downward sloping 200 hour moving average. We want to see prices consolidate between the breakout area and resistance near 233 to allow this moving average to starting rising and support higher prices.

chartThe Bottom Line: Counter-trend trades generally have a lower probability of success, but given the positive backdrop provided by seasonality and commercial hedgers, as well as the improving price action, it is worth taking a look at Oat futures on the long side here. Ideally we want to see prices consolidate between 227-235 to allow the 200 hour moving average to start rising, followed by a breakout in price above this resistance level. If you’re an aggressive long you can own it here against the broken downtrend line, but we’ll probably get a lower risk entry if prices breakout above this resistance level with that rising moving average creating an environment for sustainable rallies to develop.

This trade reminds me of the Copper futures trade I wrote about a week or two ago which resulted in a nice rally, so I’m expecting similar action in this market if the scenario I outlined above pans out.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.