No retreat for Wheat prices!

Trading Ideas

With May Wheat futures climbing above 900.00 for the first time since 2008, Wheat bulls definitely seem to have the upper hand. A quick look at the daily chart shows good chart support just above the 785.00 area. Some traders looking for this support point to hold in the next several weeks may wish to explore the sale of Wheat puts with a strike price below 785.00. For example, with May Wheat trading at 907.25 as of this writing, April Wheat 780 puts could be sold for about 4.50 cents, or $225 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in March should May wheat futures be trading above 780.00. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such strategy would be to buy back the short options before expiration should the option premium trade at 3 times the premium originally received for selling the options originally.

Fundamentals

Not even another interest rate hike by the People's Bank of China, which initially sent many commodity prices tumbling, could spark a sell-off in Wheat futures, with the March contract now trading at new contract highs. Continued strong import demand is likely one of the key drivers behind the rally, as new buying has been seen from Middle Eastern and North African countries. Though most traders are already aware of the damage being done to the Australian wheat crop due to flooding, a recent article in the Wall Street Journal reported the United Nations Food and Agriculture Organization issued a warning about a severe drought occurring Northern China that could severely hamper Wheat production in at least five major production regions. China is the world's largest Wheat producer, and although it is too early to write-off the crop, the drought situation has the potential to become serious enough to force China to have to import Wheat should emergency reserves become depleted. This morning the USDA will release its February Crop Production and Supply /Demand Report, with many analysts looking for only a minor change in Wheat carryout totals from January's report. Many analysts are looking for 2010-11 Wheat carryout to total 810 million bushels, which is down slightly from January's 818 million bushel estimate. However, should the recent increases in Wheat exports continue, we could see a bullish surprise in world Wheat carryout totals in the next few USDA reports.

Technical Notes

Looking at the daily chart for March Wheat, we notice the giant bull flag formation that formed from the “spike” high back in August. Although it took several months for the “correction” to finish, this could be the formation of a strong base for the next move upward. Despite the fact that the 14-day RSI is reading a strong 67.28, there is a bearish divergence forming in this momentum indicator. 900.00 is viewed as the next resistance level for March Wheat, with support found at the recent lows of 758.25 made back on January 11th.

Mike Zarembski, Senior Commodity Analyst