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In Issue 221 of the Trading Tutors Newsletter, published 17 August 2007, we looked at the Chicago Wheat futures market. We saw how the October 2006 top was taken out as the market forged ahead to an all-time Chicago Wheat futures high of $7.50 a bushel.
The high for Chicago Wheat for December delivery (W-2007.Z) at the time was $7.10 ½ a bushel and was trading at a premium of around 14½ cents compared to Chicago Wheat for September delivery (W-2007.U). The question left begging was, will we see Wheat at $8.00 a bushel?
Chart 1 below shows the market action of Chicago Wheat as prices broke through the $7.00 psychological resistance level. The gap-up occurred as result of a contract rollover in which volume traded in the December contract exceeded volume traded in the September contract.
On the chart the $7.50 all-time high is highlighted so we can see how close prices were to this level. Since this is an all-time high we would have expected this bullish rally to encounter some price resistance at $7.50.
Taking the range from the November 2005 low to the October 2006 high and repeating that range from the April 2007 low reveals more price pressure points to watch for resistance. On the run up from the April 2007 low we saw prices make a top at $5.30 later that month – the 50% milestone – before retracing back to make a higher low of $4.68 in May 2007.
From there we saw prices rally up through the 50% milestone to find resistance again at the 75% milestone. Prices started to move sideways during the last part of June 2007 and pulled back slightly to make another higher low of $5.74 in early July 2007.
The push up from this July 2007 low then found further resistance when it made a top just below the 100% milestone at $6.64 in late July 2007. It pulled back to $6.20 in early August 2007. It is from this higher low that Chicago Wheat prices hit the contract rollover gap, hurdled over the 100% milestone and then pulled back to try and close the gap.
Chart 1 – W-SpotV Daily Bar Chart
click chart for more detail
In Chart 2 below we can see how Chicago Wheat prices reacted after attempting to close the gap. A low price of $6.70 in mid August 2007 failed to close the gap before prices exploded upwards towards the next point of resistance at the $7.50 all-time high. The failure to close the gap was a sure sign that this rally still had the strength behind it to push prices up even further.
On 23 August 2007 Chicago Wheat for December delivery traded at a new all-time high when it made a top at $7.54 for the day but failed to close above the previous all-time high of $7.50. The price range of the following three trading days was a crucial indicator for determining which prices would break out from this tight price range.
The three trading days following the day of the new all-time high – 24, 27 and 28 August 2007 –all traded at the same low price of $7.34, whilst the first two of these shared the same high price of $7.43. The breakout above $7.50 saw prices gap up strongly to trade above the psychological resistance level of $8.00 and make the current high, at the time of writing, of $8.05.
Chart 2 – W-SpotV Daily Bar Chart
click chart for more detail
As recently as 2 April 2007 Chicago Wheat was trading at $4.12 a bushel. In the space of five months – to 31 August 2007 – prices have almost doubled to $8.05 a bushel. One must wonder if Chicago Wheat is gravitating toward an overbought level.
Looking at how prices reacted when this $8.00 level was taken out on 31 August 2007 may give us some indication of where prices will go from here. The gap up above $8.00 at the open of 31 August 2007 was followed by a strong push down with the close almost at the lowest price traded for the day. For those familiar with signal days, this would be a sure sign that this market may start to show some weakness on the way up.
Also note that we have now reached the 150% milestone of the November 2005 to October 2006 range.
For further confirmation of $8.05 as a top in Chicago Wheat I will be looking for prices to gap down from the $7.75 ½ closing price of 31 August 07. This is a signal to short this market in the form of a bearish island reversal. A continuation of this bullish run may include one last burst towards the 200% milestone before this market is completely overbought.
Trade Smart
Mario La Marra
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