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.

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.

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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.

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Daily chart of Dec. Wheat for your review below:

ZWA Wheat_(Globex) Equalized Active Daily Continuation Heikin Ashi
ZWA Wheat_(Globex) Equalized Active Daily Continuation Heikin Ashi

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Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

About Ilan Levy-Mayer

Ilan Levy-Mayer has been a commodities broker for over 15 years, and holds an MBA in Finance and Marketing from Hebrew University in Jerusalem. Ilan is currently the Vice President and a Senior Broker at Cannon Trading Company.

Take a step in the right direction and contact me today, Toll-Free: 800-454-9572 or direct: +310-859-9572. You may also directly e-mail me, Send mail.

 

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