WZ rallies 1.92 in 35 trading days, Russia gives conflicting signals, first halting exports, then promising there is no problem with them meeting their export quotas. Today we hear rumors the the drought has damaged not 20 percent of the crop but perhaps upwards of 40 percent. Still another rumor has agronomists doubting if there will be enough moisture to get the winter wheat planted after Europe’s bread basket has been cooked by the worst drought in 130 years. Finally, the Wall Street Journal, usually enamored with silicon valley, P:E ratios and Executive Salary Caps, is now suddenly focused on the wheat rally. Just take a minute to digest all of that bullish ness.
Then lets examine the chart. Before we make our final decision. A long term chart going back to the highs in July 2008 (remember 2008?) gave us $10.40 cent a bushel wheat. And, coincidentally, every farmer and his brother planted wheat. Two years later, we have the world awash in wheat, US farmers suffering basis 1.50 and worse below the board price. I have farmers in January and February telling me they are not going to plant wheat ever again…
Low and behold, a $2.00 rally, and once again, the American farmer is awakening to interest in growing wheat. After all, Wheat is very hardy, a veritable weed. At 7.50 a bushel, even with a mind numbing insulting basis for farmers of 1.50, a farmer can still contract $6.00 a bushel wheat. That is attractive. Attractive enough to pull some acres from corn, cotton, beans, what have you…
So the cycle of supply and demand is freshly fueled. Adam Smith’s Invisible Hand is once again at work.
All that being said, I have to look at the charts. Today’s high at 7.61 1/4 was 7 cents above the 50% retracement of the 2 year, $5.68 “correction” from the July 08 high at $10.39 to our recent harvest low 35 trading sessions ago, down at 4.71.
Quite a mouth full. Quite a move. And today we had our 50 percent rally, with a 7 cent extra boost. When CZ popped above 7.50, stops rallied us 11 cents in about 40 seconds as buy stops were hit, filled and then the market fell back.
Technically, we still settled well. This gives me the feeling that we are headed for the next target, the 62% retracement at 8.22. That suggests another 61 cents to go to the upside.
Will we get there soon? It sure feels like it. A limit up move in the wheat is 40 cents, so we could be there in 2 days, if the markets really want to go there.
That being said, I like selling into this move. I told you I owned Dec 600 puts for 20 cents. Today they settled at 10 1/2 cents. A slap in the face. However, I believe, that with 100 plus days to go, they will be profitable at some time.
When the correction comes, (and it will) it should be impressive. As we are so often told, markets climb the stairs, but fall down the elevator shaft. Markets go down 3 times as fast as they rally. Its a general rule that holds be it tulips in Belgium, Houses in Florida, the Dow Jones, of just about any commodity.
With this volatility comes tremendous opportunity.
I for one, am leaning towards a correction here. Of course, we could rally another 60 cents to that 8.22 level. I think tomorrow and Friday, if we don’t fall back sharply, it will be time to cover shorts and re-evaluate.
For now, I am resting my hopes on the 50% correction giving us a pause in this rally. If its sharp enough, and deep enough, it should be a profitable one.
One Caveat…If I wake up tomorrow, and hear the GMA or Today show anchors talk about wheat prices… I will sell wheat on the opening, risking 15 cents. Period. National media attention is the surest sign that a market has moved too far, too fast. Catie Curie will be the ultimate fade,or Willard Scott, talking about the drought… Good Lord, that will be a gift to the bears, wrapped up in a bow with candy canes on top.
A case in point? Walmart in 2008 or 2009 rationed rice at many of its stores, due to the spike up at that time… That story received national attention and that co incided with the high in Rice at that time. Wheat will be no different. Because markets reflect the emotions of masses of people. So, let’s see what tomorrow brings.
Remember, as always, have your exit point pre-defined. Live to trade another day. Good trades are like buses and trolleys. Sooner or later, another one will be coming by.
Good Trading
