Gann Global Financial

One of the more fascinating scenarios that are playing out is in the wheat market.  In looking across the commodity board we’ve essentially seen the commodities advance in tandem with the stock market, although they have been stalling out with the S&P 500 continuing higher.

The wheat futures market has completely diverged from the commodity board. In fact, it’s in the midst of the greatest decline since 1858. A huge historic decline on the order of what occurred during The Great Depression, if you can imagine that, and this against the backdrop of very significant advances across the board, for example, in the copper market, the crude oil markets which have advanced over 100% off their lows.

In this video we are going to look at some of the historic DNA of this market, and based upon that DNA time has run out on this commodity and its’ decline.
I want to go through our rationale and the information that we are feeding our subscribers to our commodity trading and forecasting services at this point in time.

In this first table is every bear market in history in the cash wheat market. What we’ve done is we have sorted it based upon the seasonal lows, and there is a very profound seasonal tendency in the cash wheat market to bottom during certain months of the year, relative to other commodities.

What we see is that in 27 of 32 bear markets since the 1800s, that is 84%, final bear market lows were established during the five months between June and October. “M’ is the commodity symbol for June; starting in June and going through October, so as of October 4th, we’ve now passed that date, there were three historic lows, 1982, 1990, and 1938, in October, but you can see after that there is only one November low, two January lows, one February, and one April, so the tendency is that the final lows in wheat are established by October.

There are three October dates that still lie ahead. Currently on this video it is October 8th, so within 10 days all of these seasonal lows will be in place. All that to say that this is the perfect seasonal time frame for the cash wheat to experience a final bottom.

On October 5th, we made a new low to 2.47 ½ which is still a 79% decline. You can see here The Great Depression wheat market decline was from 1928-1932 was 79%. Our decline has occurred in approximately one year and seven months; whereas The Great Depression decline was four years, six months, so the velocity of this decline is much greater than what occurred during The Great Depression which was the greatest deflationary decline in history when looked at from the standpoint of both the commodities and the stocks.

You can see the other great bear markets in history, 1923 – 69%; 1999 – 70%; 1977 – 70%; 1898 – 65%, so this is a very elite category of bear market that we’re in the midst of.
In looking at the cash chart, this has been the bear market in the cash from February 27, 2008, that was the blow-off top during the commodity market boom, and the bust cycle in the financial crisis carried the market down significantly into the December low.

Essentially, between December and February are when most commodities bottomed and experienced advances, but you can see that the wheat market rallied to June 1st of this year and we’ve seen this runaway decline in the cash ever since then.

60-Year Cycle a Factor in Our Commodity Market Forecast

The 60-year cycle has been a driving force in commodities. For example, the bull markets into January 22, 1948, which was the top of the boom cycle there, and the February 27, 2008, high in the wheat market, these were two of the three greatest percentage advances since 1858. The other was 1974.

This bull market into 2008, which occurred off the September 2005, low was one of the three greatest commodity bull markets in history. The bear market which followed in 1948, you can see that the tops were established within about five weeks of one another, of being an exact 60-year cycle, the time period of the bear market during that 60-year cycle would have projected a final low as of August 18th, so you can see that our low was actually thus far established on October 5th. This 60-year cycle is pointing higher in the market.

Now, our 79% decline equals the greatest in history which occurred during The Great Depression, and as I said before, however, the velocity of our decline makes this much greater.
This makes our bear market the greatest in history. Based upon the law of action and reaction this extreme oversold condition is setting the stage for the next major bull market in wheat.

The law of action and reaction simplistically says that the bigger the bear, the bigger the bull; or the more oversold the market gets the greater the potential for a snap-back short-term rally and the likely start of a long term bull market. In looking at this, we have the greatest wheat bear market in history.

Other Key Factors in this Commodity Forecast

What is also interesting is that we have a couple of other key factors. This leg down off the June 1st high, we’ve actually put the greatest percentage legs down in history. There are five of them.

The projections that we show here (in the video), is if we replicated the move off of the February of 2008 high to the June 3rd low, and off this high to the December 8th low, these would have been the projected moves down. This was in 1909 to this low, 1909 here, 1917.

The current decline has exactly equaled the percentage decline which occurred into this low here, which is 57%.

You can see we’ve declined 57% since June 1st. That is an amazing velocity of decline for a leg down in the wheat second only to the first leg down in this bear market.

The bottom line is we have this huge historic bear market and the culmination leg, or the projected culmination leg, is of the highest order. So, extremely oversold and we can say with all certainty that there are major speculators that have both made significant money on the short side, and speculators that have had their wallets very much lightened by what has taken place.

The other thing, and this is a key factor that we had been apprising subscribers about, the low which started this bull market back in 2005 to the 2008 high.  So one of the three greatest bull markets in 150 years, that bull market started off a low at 2.49½, so this bear market into this September low, which was 2.49½ had completely retraced the entire historic bull market that preceded it.

We experienced a short-term balance. We’ve experienced sideways trade. Then, on October 5th, this week, we broke the low but just by two cents.

What we have expressed to subscribers is that the ideal setup for entering long positions would be one more decline to beneath the 2005 low, which was tested in September, and a close beneath these lows would very likely be a capitulation point from which the market could experience an advance in the start of a bull market.

In other words, you have the trade whether it’s hedgers, farmers, you name it, very much on point as far as knowing what the cash price of wheat is doing in Chicago, so we can assume those weak-handed longs, those that have been holding long positions, answering margin calls, those that are on the fringe in terms of being strung out by this market, that the logical capitulation point would be for a significant number to sell out on a break of this cash low of 2.49½. This is essentially how the psychology of markets work.

Invariably, key highs and lows are broken fractionally to get the technicians to sell out of positions and basically scream “uncle.” That’s what has happened here in this December cash chart.

Based upon our forecasting and our formation recognition, we have the ideal for a low being in place in the cash.

We have experienced into the recent low of 4.39¼, a 40% decline during this leg down, June 1st to 4.39¼. The legs down, 27%, 48% and 40%.

You can see that on the way down we’ve had the snapback rallies, 22%, 31%, and 30%, and given this oversold condition and the seasonal bottom expected in the cash market and all of the other factors that I’ve mentioned, the probabilities are very high, I believe, that we have a low in place at 4.39¼, and that we will experience what could be a sharp, short covering rally from extreme historic oversold conditions. This market could move very quickly.

Commodity Trading Strategy

Now, November 25th is the expiration of the December wheat options. Obviously there is approximately one month and a little over two weeks for those options, but that is a vehicle which is very much in play that we have for our subscribers.

In other words, it’s a make or break point, we believe, and by the same token if it moves very quickly, similar to what occurred into the June 1st high or the January 7th high or the June 26th high, that the options can experience very significant appreciation over a very short time if we are correct.

At the same time, we do have projections in the futures market as far as where we can get on a short term rally to the upside. Let me qualify this.

This does wind up for us being a significant commodity forecast. The convergence of many things, but one of the things that we’ve told subscribers is that we can have what can amount to a truly amazing forecast; a confluence of events that take place that have their equivalent historic precedents. In other words, match the DNA of previous moves which suggest there is a high probability of something taking place.

However, even though we have a forecast, for example, for a turning point, history tells us how far the market can move as a result of that turning point.
In doing our research with respect to other situations similar to this in the wheat market, there are a couple of factors which suggest that this move will not be as robust as during other situations, if other conditions existed.

One of those conditions is if we have a very high carrying charge futures market. What that means is that distant contractors are trading annualized at 20% over the front month. What we know in looking back, and we’ve done our research, since futures began trading in 1877.

When you have these high historic carrying charge premiums, in other words, if we have wheat at one dollar today in the December contract, and the December of 2010 contract is at 1.20, that means that you have to pay 20% more for that contract one year out.

When that takes place, when you have a high premium like that, that is like credit card rate of interest in buying the wheat, when you have that kind of a high premium, what history shows is that typically the market will require some basing.

While we have a projected low in place in the cash wheat market in the final bear market low, just because we have a projected low we may also have parameters which are suggesting a basing market.

That is the case in the wheat market at this point in time, so we have a tremendous forecast on the table. I would expect to see a short covering rally in this market, and then likely some backing and filling.

The ideal in any market when you pick a major turning point, for example, at a low here, is that you would have a situation where there can be upwards of 10:1 risk reward. In other words, for every $1000 you risk you have the potential for making $10,000.

That would be a homerun situation and we would present it as such for our subscribers.  In this case we’re presenting the opportunity here as likely hitting a double, and possibly a triple based upon the multiples that we’re seeing.  It is a very high probability situation. It is going to be interesting to see how the market plays out. We do have specific recommendations in terms of where we have recommended subscribers enter this market.

I wanted to give you a glimpse and let you look over our shoulder at a very unique situation and invite you to examine our research a little more thoroughly and perhaps there is a good fit and we can help you in your overall trading and investment decisions.