Wheat Prices Retreat!
Fundamentals
Wheat bulls have been getting a bit nervous lately, as prices have fallen through key support on a change in the weather forecasts, which are now calling for rainfall in the much needed grain growing area of Russia and the Ukraine. This rainfall is too late to benefit this year's crops, but can aid in the planting of the 2011 winter wheat crop. Since contract highs were recorded back in August on concerns about the grain exports out of Russia due to severe drought, Wheat prices have fallen over 20%, as high prices have curtailed Wheat exports because buyers are starting to hold back on purchases awaiting lower prices, after a buying frenzy hit the cash market when the Russian export ban was announced in late summer. Many traders also expect India to re-enter the Wheat export market, especially if it appears that world Wheat supplies will rebound next year. Speculators have started move to a short position in Chicago soft red Wheat futures, with the most recent Commitment of Traders report showing combined large and small speculators holding a net-short position of 8,945 contracts as of September 21st. This was before this week's steep sell-off, and it would come as little surprise to see large non-commercial traders finally becoming net-short Wheat for the first time in several weeks. Wheat bulls will counter that Wheat growing areas in the U.S. could use more moisture to get the crop off to a good start, especially in the western parts of the Great Plains, but so far U.S. Wheat plantings are only slightly behind average, and any forecasts for moisture could spur additional selling as traders look for increased Wheat production in 2011
Trading Ideas
Although Wheat prices have corrected sharply since August, December Wheat futures remain above the 200-day moving average, which many technical traders look to in order to determine if a market is in a bullish or bearish mode. Traders who are expecting Wheat prices to continue to correct may choose to explore trading strategies using Wheat options that would benefit from lower Wheat prices in the near-term. One such strategy would be the purchase of a calendar spread in Wheat futures options. An example of this trade would be to buy the December Wheat 700 calls and sell the November Wheat 700 calls. With December futures trading at 673.00 as of this writing, this calendar spread could be purchased for about 13 cents, or $650 per spread. The trade should benefit if Wheat prices hold steady, or even rise or fall moderately before option expiration on the November options in October.
Technicals
Looking at the daily chart for December Wheat, what sticks out is the large descending triangle pattern that formed from the spike highs in August. Although this bearish formation is normally found as a consolidation pattern in a downtrend, it can also be viewed as a reversal formation at the end of a major uptrend! Wednesday's attempted break below the lower leg of the triangle was negated a bit, as prices failed to close below this support point when a late session rally pulled prices back above support at 677.50. Also notice the declining trading volume as prices entered the consolidation pattern. Momentum has turned negative, with the 14-day RSI trending lower, with a current reading of 42.89. A close below support at 663.25 could set-up a test of the 200-day moving average, currently near the 585.00 area. Resistance is seen at the recent highs of 757.00 reached on September 20th.
Mike Zarembski, Senior Commodity Analyst
