Wheat Prices Fail to React to a Weak U.S. Dollar
Fundamentals
Not even a weak U.S. Dollar can spark a bullish reaction in the Wheat futures market, as the bear trend that began once the June 1st highs were made continues in full force. If there is one key reason for lower Wheat prices this year it is ample supplies. Record high Wheat prices in 2008 led producers worldwide to ramp-up production. In addition, growing conditions improved dramatically from last year, when it seemed that nearly every major Wheat exporting country was experiencing challenging production issues. U.S. Wheat prices need to remain stable in order to stay competitive in the world export market this year, as Europe, Russia, the former Soviet Republics, and Canada are all competing for business. If there is one bullish nugget out there it is found in Australia, where some Wheat growers are being hampered by dry conditions due to El Nino. However, it is still too early to mark down Australian Wheat production this season, as there remains ample time for needed rainfall to arrive. Non-commercial speculative accounts held a net-short position totaling 68,927 contracts in CBOT Wheat as of September 1st according to the most recent Commitment of Traders reports. This was up 9,745 contracts for the week and clearly demonstrates the extent to which trend-following systems play in the market. While the trend clearly remains in the bear camp, should any bullish news surface, these large net-short positions could be the fuel for a bullish run in the wheat market as these large speculative accounts begin to run for the exits. This is definitely something Wheat traders should keep in mind as we move into the final quarter of 2009.
Trading Ideas
While Wheat prices continue to move lower, the possibility for a short-covering rally increases as we move towards the winter months here in the U.S. Some traders wishing to take advantage of the current downtrend and who also may want to position themselves for a possible rally later in the year may wish to consider buying call calendar spreads in CBOT Wheat futures. An example of this trade would be buying a December 500 call and selling an October 500 call. With December Wheat currently trading at 467 ½, the calendar spread could be bought for 12 7/8, or $643.75 before commissions. Here the trader would hope to take advantage of time decay on the short October option to help offset the cost of the longer-term December option.
Technicals
Looking at the daily chart for December Wheat, we notice the downtrend is alive and well after a brief consolidation phase during late August. Prices continue to hover just below the 20-day moving average, and a close above this widely watched moving average could spark a bout of short-covering by weak bears. The 14-day RSI is in oversold territory with a current reading of 28.06. Traders should notice the major bullish divergence in the RSI, which could be an indicator that the downtrend is beginning to become a bit long in the tooth. 450.00 is seen as the next major support point for December Wheat, with resistance found at the 20-day moving average currently near the 495.00 area.
Mike Zarembski, Senior Commodity Analyst
