Strategic trade
Trade view / 06 October 2016 at 8:57 GMT

#SaxoStrats: Short squeeze coming in CBOT wheat?

Head of Commodity Strategy / Saxo Bank
Denmark
SaxoStrats
 
Background

CBOT wheat dropped 30% from June to August as the outlook for the 2016-17 harvest continued to improve. After hitting a 10-year low on August 30, the market has spent the past five weeks consolidating around $4/bushel. A couple of recent attempts to sell it lower was met with buying interest, which could be an indication that most of the price negative news related to the bumper crop has now been priced in. 

Instead the focus has been switching to demand and with the dollar at its current levels, US wheat has been able to compete in the export market. 

Hedge funds held a near record short position in CBOT during the week of September 27 of 131,000 lots, somewhat bigger than the two-year average net-short of 56,000 lots. 

From a technical perspective a break above $4.11 which coincides with a 38.2% retracement of the late August selloff is likely to trigger additional short-covering with the price targeting the previous consolidation area starting at $4.25/bushel up to $4.50/bushel .

Short term:
Short term CBOT wheat chart

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Source: Saxo Bank 

Long term CBOT wheat
Source: Saxo Bank 

Parameters

  • Buy ZWZ6 (future) or WHEATDEC16 (CFD).
  • One half now ($4.07 last) and one half on a buy stop at $4.11). 
  • Stop: $3.86 (raised to $3.98 on a break above $4.11).  
  • Target: $4.25 and $4.49 (giving a combined risk/reward ratio of 1 to 3) .

Time horizon: two to four weeks .

Trade management: On hitting the second entry at $4.11, raise the combined stop to $3.98. This is a breakout trade which means the stop can be relative tight at just above 1 ATR. 

Key risks: WASDE report covering the month of October due on October 12. Dollar strength reducing export opportunities. 

Seasonality: The month of October has shown a positive return in five out of the last seven years.

— Edited by Michael McKenna

For more on commodities click here.

Non-independent investment research disclaimer applies. Read more
13 October
yakcay yakcay
This trade just failed. Bought half at 4.07 then yesterday another half at 4.11.... Then within minutes it crashed and hit the stop for maximum possible loss.
14 October
yakcay yakcay
... If the stop were not raised to $3.98, would have been in for a large profit... instead had to write a big loss... pity...
14 October
Bullionaire Bullionaire
I'm still in this trade awesome trade. Thanks

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