- Whenever the subject of trading oats comes up, I'm reminded of what my late friend Gary Wilhelmi told me about the pit trade in Chicago.
- Technically, I'm not seeing a bullish reversal pattern on the Dec24 weekly chart, but things can change quickly.
- Fundamentally, the oats market doesn't have reliable reads, but what we can see is not bullish. At least not today.
I had a question come in about oats this week. Before I dive into the discussion, the subject of oats always brings to mind a couple things. First, back when I had the opportunity to talk with the late Gary Wilhelmi every day, he often told me the story about life in the Chicago Board of Trade oat pit. Reportedly, the pit was run, in Gary’s words, “by one of the meanest guys on the floor”. He and his compadres would wait for an unsuspecting trader to place an order in the oat market, then rip the newbie to shreds like a young calf that accidently wandered into a piranha-filled river. This story always took me back to my days as a broker in central Kansas when, inevitably, a customer would come in wanting to outsmart the corn and wheat markets by trading oats. Why? Because of the second thing that comes to mind: The silly old saying, “Oats knows where corn goes”. As I’ve pointed out numerous times over the years, this gets said more often when oats are rallying and corn is selling off. Because, as you know, everything always has to be bullish for corn.
Back to my friend’s question. The first part had to do with a technical look at the market. If I apply the Goldilocks Principle[i] and look at the Dec24 (the contract with the most open interest) weekly chart, it looks like the contract could be nearing the completion of a 3-wave intermediate-term downtrend. As of Friday (June 14) morning, I don’t have a bullish reversal yet meaning Wave 3 could have more downside.
Additionally, weekly stochastics are still partially above the oversold level of 20% meaning there still looks to be time and space for the contract to move lower. Sneaking a peek at the Dec24 daily chart shows the contract is short-term oversold, with stochastics near 0%. But again, I don’t put a lot of faith in short-term daily charts, particularly in a lightly traded market like oats. For now, the Dec24 issue is within sight of its previous low at $3.32, so let’s see if the contract wants to give that mark a solid test before rallying.
Additionally, we don’t get a great read from weekly CFTC Commitments of Traders reports either. (Are you starting to see a pattern as to why it is difficult to trade oats profitably?) Last week’s CoT report (legacy, futures only) showed funds held a net-long futures position of 1,208 contracts. What does this mean in the grand scheme of things? I don’t know. The CFTC doesn’t show position changes for oats.
But what about fundamentals? My friend pointed out the latest WASDE held its 2024-2025 ending stocks guess at 27 mb, as compared to its 2023-2024 guess of 34 mb. (Setting aside my Marketing Year Misdirection[ii], the marketing year for oats runs from June 1 through May 31, the same as wheat.) But what about REAL market fundamentals? First and foremost, my years as a grain merchandiser taught me oats is a cash-driven market, but unfortunately I don’t have a national cash index to track. This takes our read on basis and available stocks-to-use away, leaving us with futures spreads. Also unfortunately, trade volume is so light, spreads can easily be skewed.
If I wanted to look at spreads, the only contracts with much open interest at this time are July (1,400 contracts), September (890 contracts), and December (1,740 contracts). As of this writing the July-September spread was showing a carry of 2.25 cents, the September-December a carry of 9.0 cents, and the July-December a carry of 11.25 cents. The simplest reading would be the commercial side is not overly concerned about suppy and demand heading toward another weekend.
Given all this, how would I trade Dec24 Oats?
- I wouldn’t.
- See point number 1.
- One could look at buying Dec24 when a reversal pattern is completed, running a stop below either the previous 4-week low or longer-term low.
If one chooses to follow route 3, don’t be surprised if you start feeling like something is biting and tearing all your flesh away. It’s all part of trading oats.
[i] Daily charts are too hot, monthly charts are too cold, but weekly charts are just right.
[ii] Marketing years only exist for accounting purposes. Supply and demand is fluid and always changing.
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On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.