Wheat Playing Catch-Up as Commodities Rally
Fundamentals
"Every dog has its day" is a fitting saying to describe the recent rally in the Soft Red Winter Wheat futures ("SRW") traded in Chicago. March Wheat has rallied to highs not seen since July, as the continued battering of the U.S. Dollar has commodity funds in a buying mood for anything "commodity", Wheat included. Fundamentally, the recent rally seems suspect, given ample world Wheat supplies. In addition, Wheat exports have not been stellar, despite a lower greenback. If there is any "bullish" news behind the recent rally, it would be planting delays seen in the eastern parts of the Midwest due to a slow start of the Soybean harvest, as wet weather has kept producers out of the fields. Many producers will plant Winter Wheat as a double crop after the Soybean harvest is complete. However, producers have begun to catch-up on their Wheat plantings, although private weather forecasters are calling for continued cool, wet weather into next week. Large speculative accounts have been holding a net-short position in SRW futures, and some traders believe that short-covering buying has been behind the recent rally. The most recent Commitment of Traders report shows that large non-commercial traders were holding a net-short position of 8,730 contracts as of November 9th. This was down by 1,894 contracts for the week, and adds credence to the theory that the rally is due to short-covering. With prices nearing $6 per bushel in the March futures, we may start to see producers begin to sell Wheat into the market from storage, in order to take advantage of recent price gains. If this occurs, Wheat bulls may find it difficult to keep prices moving higher as hedge selling emerges.
Trading Ideas
Given the suspect nature of the recent Wheat rally, some traders may wish to investigate bearish option strategies to take advantage of a potential correction in the market. More conservative traders may want to consider bearish put spreads, such as buying a March Wheat 570 put and selling a March Wheat 520 put. With March Wheat futures trading at 597.50 as of this writing, the spread could be purchased for 19.50 cents, or $975 per spread, not including commissions. The premium paid is the maximum potential loss on the trade, with a potential profit of $2500 minus the premium paid should March Wheat be trading below 520.00 at option expiration in February.
Technicals
Looking at the daily chart for March Wheat, we notice prices have just made a 50% Fibonacci retracement from the June 1st highs of 739.75 to the October 2nd lows of 459.00. Prices are now above both the 20 and 100-day moving averages, which is usually viewed as a bullish indicator. The 14-day RSI has just moved into overbought territory, with a current reading of 70.20. However, we may be seeing the start of a bearish divergence forming in the RSI, which could be signaling that the recent rally is beginning to look tired. The next resistance point for March Wheat is seen at 632.50, with support found at the recent lows near the 516.50 area.
Mike Zarembski, Senior Commodity Analyst
