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Technical tool: Relative strength index

Getty/iStockphoto Upward trend blue graphic
All four commodities are in a long term uptrend with soybeans leading in strength.

Last week I discussed bullish consensus, a technical indicator to let us know when a market is over-sold or over-bought. It is a subjective evaluation of the market outlook.

There is an objective version of bullish consensus. The relative strength index, RSI, is a mathematical evaluation of a commodity’s price action in the short, medium and long term.

RSI is a two stage (up days and down days) momentum indicator which tracks the average daily gain and loss in a given “look-back” period to measure the overbought or oversold conditions indexed on a scale of 0 to 100.

Like bullish consensus, a RSI of 50 is perfectly neutral, meaning the price is just as likely to go up as it is to go down. A RSI of 30 is an oversold market; a RSI of 20 is rare and grossly oversold. An RSI less than 30 is a buying opportunity for a short term trade in a down-trending market or longer term positon in an up trending market.

A RSI of 70 is overbought and is due for a down day or two. A RSI of 80 is grossly overbought. A RSI over 70 is a selling opportunity for short term trade in an up-trending market or long term position in a down trending market. RSI is the primary indicator for many selective hedgers and short term spec traders.

The fewer number of days included in the RSI formula, the more short-turn is the price outlook. A three-day RSI would be a tool for day traders (in and out of the futures market during one trading session) or for farmers trying to decide whether to sell cash grain today or tomorrow or the day after tomorrow. RSI numbers using 50 or more days is not going to help one make a marketing decision for this week, but 50 and 100 day RSI are valuable for a longer term pricing perspective. The 9-day RSI is the one to use if you are looking for the day to price in the next within a week or two. The 14 and 20-day RSI is what you want to watch if you are looking to sell in the next month or two. The longer term RSI numbers are big picture perspectives. Generally speaking, don’t be selling when the 100-day RSI is below 42 or so and be looking to sell when the 100-day RSI is above 58 or so.

Barchart calculates every commodity’s 9, 14, 20, 50 and 100-day RSI throughout every trading day. Go to www.barchart.com, select your commodity, go to the contract month you desire, and click on the “Technical Analysis” link on the far left column to access a page with up-to-minute Moving Averages, Stochastics, and RSI.

As of the close Dec. 21, 2021, take a look at these RSI numbers:

March Corn Soybeans CBOT Wheat KC Wheat
9 day 65.1 71.8 54.2 31.2
14 day 62.2 65.2 51.7 57.7
20 day 60.5 60.8 51.7 56.8
50 day 56 53.5 53.2 56.6
100 day 54.6 52.7 53.7 56

You can see March soybeans are over bought; you can also conclude all four commodities are in a long term uptrend because all the RSI numbers are above 50. The CBOT wheat is the weakest up trend because the 9-day RSI is almost the same as the 100-day RSI and, therefore, is in a mostly sideways trading range for the past 100 days. On the other hand, soybeans have the strongest uptrend because the positive difference between the 9-day and 100-day RSI is the greatest. The same observation of the corn RSI numbers shows it has the second strongest long term uptrend followed by KC wheat which is essentially in a sideway trend, but is nearer to the top of the sideways range than the CBOT wheat because of the stronger 9-day RSI.

The overall conclusion is soybeans are due for down day or two, but beans have the strongest uptrend. Based on this information alone, don’t be selling cash corn or beans yet; wait for higher prices. The wheats are in solid long term sideways trends. Spec traders will be comfortable to go long near the bottom of the sideways range and go short at the top of the sideways range. If you have wheat to price and if you think the next trend in wheat is down, then get your orders placed to sell wheat at the top of the sideways trading range and be watching for a breakout to the down side of the sideways range, which may happen before your sell order gets filled. The seasonal price trend will help you decide when that might happen (hint).

Wright is an Ohio-based grain marketing consultant. Contact him at (937) 605-1061 or [email protected]. Read more insights at www.wrightonthemarket.com.

No one associated with Wright on the Market is a cash grain broker nor a futures market broker. All information presented is researched and believed to be true and correct, but nothing is 100% in this business.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

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