Wheat: Are We Looking At A Trend Reversal?

It seems wheat futures put in an interim bottom last week, as the May contract busted through overhead resistance (20-day MA, light blue line) in intraday trading. Having already spent five weeks in oversold territory, I’m thinking this bounce could be the first or second inning of a trend reversal to the upside.

Prices have closed higher each of the last six sessions. Wheat hasn’t put in a six-day winning streak since last June. While past performance is not indicative of future results, that six-day streak last summer triggered a 30% plus rally in the May contract. Let’s see if this just-begun wheat rally has the same vigor. We’ll get further confirmation of this potential bull trend if prices penetrate the down-sloping trend line that has been in place since prices peaked last November.

Strong Exports Help
Exports, Thursday morning, were strong. Following the good shipments earlier in the week, this market may have turned the corner. The latest Commitments of Traders (COT) report adds further evidence of wheat’s upside potential. This report provides a breakdown, every Tuesday, of open interest for each market in which twenty or more traders hold positions equal to or above the reporting levels established by the CFTC. Basically, it tallies the net positions of big traders. Wheat prices could jump higher from short covering alone, as large speculators with considerable bearish exposure take profits near wheat’s roughly nine-month lows.

The Play
I have advised traders to allocate to bullish trade and suggest using the Fibonacci levels (see chart above) as potential profit targets. I suggest giving this trade ample time to work out, so I’m advising clients to gain bullish exposure in either the July or December contracts. For now, my preferred method for gaining bullish exposure is buying futures while simultaneously selling out-of-the-money calls, 1:1. As of writing, I’d look to sell July calls 30- to 50-cents out-of-the-money (OTM). December calls should be 60- to 80-cents OTM.