Commodity Market on the Move

Wheat futures, along with the rest of the grain complex took a beating last week on a stronger US Dollar and favorable MidWest weather conditions. This Wednesday's USDA crop report could be pivotal on whether prices continue lower or go back higher to regain uptrend status. Although the seasonal trend points to higher prices, Wheat is still subject to broad-based commodity sell offs that occur during Dollar strength and volatile equity prices. The daily chart shows the July support being taken out and is now on its way to retest the June 2010 low of 577.00. This is a significant low because if you look at the Weekly chart (Fig 1), the contract has come down and bounced off of this level several times going back as far as 2007. Traders will be watching closely to see if these lows hold after the Wednesday crop report to see if this will be the final push needed to validate the seasonal trend.

Assuming the lows hold, December futures could be purchased with stops below the 577 lows or purchase an at-the-money put and exit the put when able to place a protective stop on the futures contract. Another idea would be to purchase December or March call options or call debit spreads looking for a retest of the 50% retracement level at 782 on the Dec chart or 797 on the March 2012 chart, and risk approximately half of premium paid as a sign to exit. If the 577 levels fail to hold, look for possible trades down to 550, 525, and 500.