Wheat Woes Already Priced In?
Trading Ideas
Currently, Wheat fundamentals likely can be seen as bullish. However, many traders may have already priced-in global supply tightness, which could make the market vulnerable to selling pressure. Likewise, the chart does show the Wheat market in a vulnerable position, but no downside breakout has been confirmed. Aggressive traders that may be looking to enter into a bearish position, despite the lack of technical confirmation, may want to consider taking a more cautious approach by entering into a bear put spread. An example of such a spread could be buying the March 750 put and selling the March 730 put for a debit of 7 cents, or $350. The trade risks the initial cost and has a maximum profit of $650 if the March Wheat contract closes below 730 at expiration.
Fundamentals
Wheat prices gained on the heels of Corn, as the USDA reported a widening deficit in this year’s Corn crop. While Wheat moved higher in sympathy with Corn, the report likely would not be seen as bullish for the grain. The production deficit for the current crop year was forecast to drop to 19.4 million tons from 20 million tons in last month’s report. Wheat may actually be vulnerable to selling pressure, as many traders have already priced-in the large shortfall and the impact of the heavy rains in Australia. However, the downside potential for prices may be limited due to concern among traders that 2011 may face the same type of food shortages seen in 2008.
Technical Notes
Turning to the chart, we see the March Wheat contract holding above support at 750. A close below this level could be seen as a downside breakout and a confirmation of a double-top pattern on the daily chart. If the double-top is confirmed, prices could possibly trade down into the low 700’s. Recent closes below the 20-day moving average indicate that a relative high may be in place. The 50-day moving average comes in just below support at 750, and a close below the average could further validate a downside breakout if it were to happen.
Rob Kurzatkowski, Senior Commodity Analyst
