How high is Too High for the Wheat?

In June of 2009, Kansas City December Wheat posted a high at 7.92 3/4. 12 months and 3.08 lower, we posted our recent harvest low at 4.85. We just recently blew through the 50% retracement, at the 6.40 level. If you’ve been reading my blog, you know I like to trade with the 50% level as a target to initiate trades, both long and short.

Technically, if we settle higher here tomorrow, the last trading day of the month, and the last day of the week, we could be setting up for another leg up. If we settle well tomorrow, I would think that the 62% retracement level would be our next upside target. That is at 6.75.

If the drought is more serious in Russia and the EU, we could see continued upside pressure. However, at some point, the world will release its ample supplies and crush this rally. Fundamentally, there is still a ton of wheat available, world wide.
This is a situation where the funds had had a monster short position on for a long time. Their unwinding has given us this 1.70 cent rally.

However, this market may have another dollar rally in it. What could fuel this? Any number of things… If this market gets going and no one steps in to sell cash wheat, or if there are stubborn short specs who are trading the fundamentals, looking at the supply/demand fundamentals, and holding fast, they could be in for a squeeze of the proportions of historical Pompeii. Times like this fundamentals can become “funny mentals”. Explanations of why the rally shouldn’t continue fall by the wayside as the market thumbs its nose at the evidence and rallys inexorablly, taking the fortunes of those traders who would rather be “right” intellectually.

Markets move on complex mix of intellect and emotions, fear, greed, timing, weather, politics, etc.. It all gets thrown into a mixer. Sometimes that mixer is set to “slow chopp” other times, its set to “frappe” or “liquify”… We could be in a market that has slipped into that latter category, just waiting to teach stubborn bears a lesson they might never forget.

Bottom line, there is no reason we could not go higher. As more and more analysts come out talking about all the reasons we should roll over and correct, every day without a correction makes the rally that much more impressive.

The trend is your friend, and the trend is up. You could waste a lot of energy, time and money buy not simply trying to stay with this trend. If we settle well here Friday, Monday we could see real fireworks higher. Look to take advantage of this with some cheap calls.

If the market turns south, you will limit your risk to your option premium. That is much more of a good trade then getting long futures and getting caught in a downdraft if the market does not follow through to the upside.
The correction will come. And when it does, it will be impressive. However, no one knows if will start tomorrow with a whimper, or 5 weeks from now with an explosion.

Manage the risk. Don’t let the risk manage you.

Good Trading.

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