The Chicago wheat futures market has made a valiant attempt at a rebound. The market fell more than 20% between October and January and has now recovered to its nearest point of chart resistance around $6.60, the old August low. The seasonal strategy suggests this is too early for the market to put in a spring low and the commercial traders appear to be thinking the same thing.
Seasonally, the May Chicago wheat contract tends to bump around its lows between November and February before making one last flush prior to spring. We view the current situation in the wheat futures as having a high correlation with the market’s typical seasonality. We see the recent rally as premature, as well.
The commercial traders as reported by the CFTC’s weekly Commitment of Traders report suggests that wheat supplies are ample and their primary concern remains focused on hedging the current crop from the production side. This is reflected in the net commercial position being on the sell side for nine of the last ten weeks.
Friday’s failure was sufficient to reverse our short-term momentum indicator out of overbought territory. We are using the recent overbought rally to enter a short position while using the bearish seasonality along with the concerted effort of commercial short sellers to back our position. You can see the setup on this chart. As always, we will have a protective stop working in the market at all times.