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Oats Basing for Reversal Near Decade Lows

A long-term continuous chart of oat futures (ZO) shows a 2016 low of 171.75. In 2009 oats a hit of low of 170.25 before rallying above 250, and ultimately above 420. In 2006 oats were down to 173.5 before making a climactic run to above 460.

Based on the last decade, the 170 price region is powerful long-term support, ultimately halting downtrends and redirecting the price back to the upside. Whether this level will continue to be support and halt this current decline is unknown, but there is evidence it is happening again.

  1. A bull run in commodities has already begun. Other commodities such as corn, the soybean complex, oil and some metals have all had strong trend reversal moves to the upside. There are a still some stragglers, but ultimately most (not necessarily all) commodities will be dragged higher if a long-term commodity uptrend unfolds.
  2. In the oat market a basing pattern has been forming above the 171.75 low. A basing pattern is sideways movement where buying and selling balance out (sideways movement). This shows sellers are no longer in control, and opens up the potential for a rally. A good basing pattern isn't just sideways movement though. For a basing pattern to potentially turn into an uptrend, it should have other factors working in its favor. These include: the pattern occurring near substantial historic support, near long-term commodity cycle lows, and preferably there is confirmation from other commodities. It wasn't until this point in the downtrend when we have all these major factors aligning for a long-term trend reversal in oats.

Figure 1. 10 Year Continuous Weekly Oats Chart

Trading oats for the long-term rally is more difficult that predicting a general area will be a bottom.

The September oats contract has been moving between 192.75 and 229 since February. That could continue for a while, with the price even spiking briefly below 192.75 to flush out stop loss orders before moving higher. This type of price action is quite common in basing patterns. Therefore, while the price is currently trading near 218 (September contract), the safer trade is to wait for a pullback toward the 200 region and buy there. Another option is to buy near current levels hoping for a breakout above 229 (which could potentially end the basing pattern and signal the uptrend is underway). The problem with the latter approach is that if the price continues to move sideways (instead of rallying right away) the entry point is poor relative to what is available on the pullback.

Trading a potential shift in trend can be frustrating. There is no perfect way to trade it, and if a long-term uptrend does develop, it may take a couple attempts to get in. Over the next one to two years though, if history is an indication, oats will likely be trading north of 380.

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