Tuesday, January 3, 2012
The daily chart for March Wheat is showing a major area of resistance starting at 650.00 and moving all the way toward 700.00. It may be difficult for March Wheat to move above the upper bounds of this resistance given its current fundamentals. Some traders who are expecting this resistance area to hold may perhaps wish to explore selling call options in Wheat futures with strike prices above the resistance area. For example, with March Wheat trading at 651.50 as of this writing, the February 700 calls could be sold for about 7 ½ cents, or $375 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in late January should the March Wheat futures be trading below 700.00.
After falling to yearly lows of 577.25 in the middle of December, March Wheat futures staged a nice comeback to end the year, rallying nearly 75 cents from the lows following a price recovery in both Corn and Soybeans due to concerns about South American crop production. Dry weather in both Brazil and Argentina have stoked fears of potential production losses for both Corn and Soybeans, which may force more export business to the US. Wheat prices may also benefit from a less than stellar South American crop, as higher prices for Corn or Soybeans could spark increased interest in Wheat for feed usage. However, any major rally in Wheat prices may be short-lived, as the global supply of Wheat remains ample. Since Wheat prices appear to be the follower in the grain complex, any signs of improving South American weather may hit Wheat the hardest, especially with its rather bearish supply fundamentals. Chicago Wheat futures currently have the largest net-short speculative position according to the Commitment of Traders Report. Much of the recent rally may be tied more to short-covering than actual fresh buying, which would make further price gains difficult, unless we see a major shift in the fundamentals for Wheat specifically, which outside of a major drought in the Central and Southern Plains of the U.S. this winter may be a difficult task for Wheat bulls to rely on.
Looking at the daily chart for March Wheat, we notice the recent price rally occurred on lower than average trading volume. This is a hallmark trait of a market in the midst of short-covering. We are also seeing prices start to find some resistance near the 655.00 area, which has caused prices to begin to move sideways. The 14-day RSI still looks strong however, with a current reading of 64.85. The next major resistance level for March Wheat is seen at the October 28th high of 688.50, with support seen at the 20-day moving average currently near the 612.50 area.
Mike Zarembski, Senior Commodity Analyst