Countertrend Wheat Rally
CBT wheat futures continue to correct the major bull run from 2006-’08. However, based on our work at 4Cast, we think that this big correction is almost complete. We have been tracking a large scale A-B-C pattern off the top from March 2008, which we expect to end in the second quarter. Before that pattern terminates, room exists for one more push lower to the $4.71-$4.60 zone. That is a key area as it coincides with the major bottom breakout from September 2006. That zone is expected to set the stage for another good upward move in wheat toward $7.31.
TECHNICAL BACKGROUND
Figure 1 shows that the market has been locked in a solid downward trend in recent months. Sentiment indicators are at bearish extremes, and remember that bearish extremes often occur just before a short- or medium-term bottom is reached. As of mid-March, we continue to see many positive signs that the downtrend from March 2008 has moved into what we like to call the exhaustion/transition phase—the period just before a short- or medium-term bottom takes shape.
click image for larger view
BULLISH SIGNALS
The first positive technical signal emerging is that wheat is in the process of ending a larger degree A-B-C pattern in the $4.71-$4.60 area. Second, sentiment indicators are at extreme bearish readings; something that normally occurs just before a market reaches a bottom. Third, volume has been steadily contracting since June 2008 at the same time prices have been moving lower. Declining prices accompanied by contracting volume implies that the downtrend is nearing its end. Finally, monthly chart oscillators such as the 14-month relative strength index (RSI) are at their most oversold levels since November 2004 and November 1999, which suggests that the market is ripe for a countertrend move.
Based on the positive signs, the chart setup strongly suggests that traders should position and play for a short- to medium-term countertrend rally up to $7.31. As long as the market does not close below $3.99, then we would continue to have a short- to medium-term rally view. In the event that the market does not reach the projected buy setup in the $4.71-$4.60 zone before shooting higher, traders should still try to buy the market on dips.
Keep in mind that this is a short- to medium-term countertrend correction view. Once the smaller degree a-b-c pattern comes to a potential end at $7.31, wheat will likely be in position for a drop back toward $5.50.
THE TRADE
• Buy: CBT wheat futures in the $4.71-$4.60 zone.
• Profit objectives: $5.77, $6.45 and $7.31....