Wheat Stuck in Bear Market
Thursday, October 13, 2011
Wheat prices have encountered bearish conditions that may be difficult for the market to overcome. Supplies are expected to be at their highest levels in almost a decade, and demand could continue to slip. There would likely have to be a sharp global economic turnaround combined with inclement growing conditions to spring the bulls into action. Thus far, the market has held technical support at the $6.00 mark, and the oscillators are giving mixed signals. Some traders may possibly wish to consider shorting the futures contract on consecutive closes below the 600 level. This trade should be considered risky, given the market volatility. Some more conservative traders may perhaps want to consider entering into a bear put spread, buying the December Wheat 600 puts and selling the Dec 550 puts for a debit of 14.00, or $700. The trade risks the initial cost and has a maximum profit of $1,800 if the December futures close below 550 at expiration.
Fundamentals
Wheat futures tumbled after yesterday's USDA report, which projected Wheat stockpiles will be at their highest levels since 2002. This year, Wheat prices reached their highest level since hitting record levels in 2008. As a result, many farmers have increased their acreage to capitalize on the high prices levels. This has been the phenomenon not only in the US, but in other countries as well. Record plantings in China and Australia are clear evidence of this. Healthier crops in Russia, the Ukraine and China, combined with a stronger US dollar, are also leading to lower demand for US Wheat. Wheat prices have also been hurt by external forces, as commodity prices have been weaker as a whole lately.
Technical Notes
Turning to the chart, we see the December Wheat contract coming down to test support near the $6 level in recent sessions. This is a critical support level for the Wheat contract, and failure to hold this support could drive prices down to $5, or possibly even the $4.50 mark. It is interesting to note that the RSI indicator bottomed-out on Sep. 23rd, which was over a week before the most recent lows. This can be seen as a potential sign that the market could turn around. Countering this is the bearish divergence seen between the RSI and momentum indicators, where momentum has seen a modest bump, but the RSI has rebounded sharply.
Rob Kurzatkowski, Senior Commodity Analyst
