When to pay more (or less) attention to markets

Which markets:

• UK feed wheat futures – The UK futures market reacts to global grain supply and demand and events, as well as the UK situation. As such, these futures prices can give insights into the trends for all UK grain prices
• Paris rapeseed futures – This is the European benchmark for rapeseed prices. UK-delivered prices follow Paris rapeseed futures closely, though there are variations to the extent due to UK production and demand, and changes in the sterling-euro exchange rate. We use Paris rapeseed futures converted into £/t to help show the potential influence on our rapeseed prices. We use the daily spot exchange rates from the European Central Bank

Which contracts:

We show either the May or November contract months. The May and November contracts are the most heavily traded UK feed wheat futures contracts. They are the contracts that many physical prices are based on.

November is the first contract month after harvest, and it is often used to represent prices for the new or coming season. Whereas May is towards the end of the marketing season and is seen as a barometer for ‘old crop’ prices once the previous November contract has finished trading.   

For Paris rapeseed futures, the most traded status can switch between May, August and November.  May, again, represents the end of one marketing season, while August and November are key points for the new season. We’ve chosen to use the May and November contracts as these line up with key UK trading points.

These contracts are shown until several weeks before they finish trading, three weeks for UK feed wheat futures and four weeks for Paris rapeseed futures. In a contract's final weeks, the amount of trade reduces and makes them less useful as indicators of wider market conditions.

View more futures prices and the prices for more contract months

The idea behind ‘resistance’ and ‘support’ lines is that there are levels that it is more difficult for prices to move above or below.  A resistance line is seen as having the potential to ‘limit’ price rises, i.e. prices may struggle to rise above that point unless there’s significant market news. Conversely, a support line is seen as having the potential to ‘limit’ price falls i.e. prices may not fall below that level.

The lines or levels are subjective and different people can see resistance and support in different places. However, they can commonly include horizontal lines at round numbers, such as £200/t, or the highest/lowest prices within a recent time period.

The lines in our market reports are chosen by our analysts to reflect their interpretation of the market. We most commonly show two horizontal lines.

What it means

When daily prices approach a line, it can (though not always) mean a current price trend could be at risk of changing, whether upward or downward. The news and information in the market is key to how easily the daily prices cross a support or resistance line.

For example, if adverse weather forecasts pushed prices up towards a resistance line, updated forecasts, which include large cuts to yield predictions, might mean prices still cross the line easily. 

It can take several attempts to cross a resistance or support line, often called ‘testing’. Even if a price crosses a resistance or support line on one day, the prices can still move back above/below the line the following day.

If a price repeatedly fails to cross a support or resistance line, it can (though not always) add further strength to the support/resistance level. This can make it harder to cross the line without new market information or news.

For example, if worries about slow new export sales had pushed prices down towards a support level, it might take the news of existing orders being cancelled to push prices below it.

However, successfully crossing a line can, in turn, add more support to an upward price trend, or more pressure to a downward price trend.

How to use them

Look out for when prices are approaching these lines, as these are times when it can pay to pay closer attention to markets. However, when prices are drifting mid-way between resistance and support lines and there’s no key news imminent, it’s possible to dial back market attention. 

This is the average price from the previous 20 trading days at any point in time. It is a simple rolling average, so it is all the closing prices from the previous 20 days added up and divided by 20.

Many types of rolling average (also called moving average) are used to analyse markets, but some commonly used averages are for the past 5, 15, 20, 50 and 200 days. The number of days chosen depends on whether the person wants to focus on the short, medium or longer-term trend.

We’ve chosen to show the 20-day average as our standard for these graphs as 20 trading days equates to roughly 4 weeks for our markets.

We feel this filters out some of the ‘noise’ from short-term volatility, while still highlighting the more significant shifts in the market. However, you may also see us adding the 5 or 50-day average from time to time when it’s relevant.

How to use them

Rolling averages primarily show the trend in prices. So, when prices approach the average, the average can be seen as offering support to declining prices or resistance to rising prices.

As a recap, the idea behind ‘resistance’ and ‘support’ lines is that there are levels that it is more difficult for prices to move above or below. 

If prices cross through the average, it can be seen as a signal that the current trend is a strong one and may continue until it finds the next support or resistance point. So, look out for when prices are approaching the average (particularly if they have been well above or below for a period). These are times when it can pay to pay closer attention to markets.

However, when prices are drifting around the average and there’s no key news imminent, it’s possible to dial back market attention. 

Why we may show averages for other time periods

You may also see us show averages for other time periods than 20-days from time-to-time. When a shorter-term average e.g. 20-days ‘crosses’ through a longer-term average line e.g. 50 days, it can signal that the trend in prices is changing.

Some traders, particularly speculative traders can use ‘crossings’ as a signal to ‘buy’ (when the shorter-term average rises through the longer-term average) or ‘sell’ (when the shorter-term average falls through the longer-term average). We will show these averages when we think it could be important.

The relative strength index or RSI is a measure of the momentum in markets. Momentum measures how quickly prices are rising or falling. Another way of putting this is market momentum is the strength of the trend in prices, and it can highlight when a change in price direction may be coming.

Sometimes a change in the trend happens, sometimes it doesn’t – that depends on what happens next with the factor(s) that are driving the price trend.

For example, if slow exports were pushing prices lower, the fall in prices may be enough to attract new export sales and lift prices again. But, if the slow exports are due to good crops in importing countries or government policy, the trend for falling prices may continue.

The calculation

We use a well-established calculation of market momentum called the ‘Relative Strength Index’ or RSI. It was created by J. Welles Wilder Jr. in the late 1970s and shows the market momentum as a level from 0 to 100.

An RSI can be calculated for any time period. We have chosen to look at the RSI over the past 20 trading days, which usually equates to roughly four weeks for our markets.

It’s calculated from:

Relative Strength (RS) = the average gain from all the days in the past 20 when prices rose. This is divided by the average loss in price from days in the past 20 when prices fall.

RSI = 100−(100 / 1+RS​)

How to use it

Keeping a closer eye on markets can pay off when:

• The RSI is approaching or crosses key levels (30 and 70). The level of 70 is known as ‘overbought’ within this type of analysis; it suggests that prices may have risen too quickly. Meanwhile, the level of 30 is known as ‘oversold’ and it suggests prices may have fallen too quickly. So, these levels can be a warning sign that a change or pause in market direction is looking more likely – though market news will determine if it happens or not. Key market news e.g. very poor / excellent crop conditions or geo-political events can continue the current trend, despite an RSI crossing these levels
• There are bigger changes in the RSI over the week. Bigger changes in the RSI point to stronger shifts in the market trend and times when more attention is needed

But, these can signal it’s possible to dial back the market focus:

• The RSI is approaching 50 (either from below or above). An RSI hovering near 50 suggests there’s something stopping the market from either moving up or down. This can in turn limit momentum unless there’s notable new ‘news’
• There are small changes in the RSI over the week or longer. These can point to a more stable market trend and times when less attention is needed