Is the Wheat Rally Real or Just a Short Covering Bounce?

Along with the rest of the grain complex and many other commodities, the wheat market has taken a serious beating, declining from $7.64 in May to $4.66 in late September! That is a very serious drop in price (close to 40%!!) in a short period of time.

In recent weeks, the wheat market has bounced almost $0.60 from its lows and the big question longer term traders, as well as swing traders, are asking themselves, is the following: Is this just a chance to go short again or is this the beginning of a reversal to the upside.

My answer is still undecided. I believe that the recent sell off across the commodities, and the grain complex specifically, was a little overdone and hence we should see a correction. On the flip side, the majority of strong trends do NOT just simply stop and reverse right away. Many times the markets will find value in the new trading range and will trade between what traders perceive is fair value levels. It can take a while for this type of new trading range to establish itself and to determine if a new leg down or a strong leg up develops.

In the case of Wheat and the daily chart below, I am looking at the $5.00 psychological level and $5.36 Fibonacci 61.8% level as a wide band where I expect the market to trade and find fair value for a period of time.

Not much on the fundamental side other than plantings and export sales, so market may be more of a technical market for next few weeks.

At this point I would be more inclined to attack the market from the long side if I can get in closer to the $5.09 level , looking for a test of $5.36 and using levels right below $5 as stop levels.

Another thought is to "play the wheat market" in a spread against another grain market with the thought that wheat will become stronger or weaker versus beans or corn for example. So if you think this rally in wheat is just a bounce, you may choose to go short wheat and long corn and vise versa. More on futures spreads in this excellent article.

Daily chart of Dec. Wheat for your review below:

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About Ilan Levy-Mayer

Ilan Levy-Mayer has been a commodities broker for over 15 years, and holds an MBA in Finance and Marketing Marketing Marketing is defined as the business process of identifying, anticipating and satisfying customers' needs and wants.This is a crucial element of any operation or brokerage in the financial services space. Well-funded marketing campaigns are instrumental to the survival and longevity of these companies in an increasingly competitive industry.Within the forex space, marketers perform a wide range of functions to help procure, secure, or retain clients.In particular, newer forex brokers also have t Marketing is defined as the business process of identifying, anticipating and satisfying customers' needs and wants.This is a crucial element of any operation or brokerage in the financial services space. Well-funded marketing campaigns are instrumental to the survival and longevity of these companies in an increasingly competitive industry.Within the forex space, marketers perform a wide range of functions to help procure, secure, or retain clients.In particular, newer forex brokers also have t Read this Term from Hebrew University in Jerusalem. Ilan is currently the Vice President and a Senior Broker at Cannon Trading Company.

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