CBOT wheat prices peaked in early November of last year. Since then, prices have lost over $2 a bushel. "Meh -- what's $2 a bushel," you ask!? How about $10,000 per futures contract! That's a pretty big move; especially considering you can trade wheat with a margin commitment of just over $3,000 per contract.
Of course, no trader consistently picks tops and bottoms with this precision… but even capturing 40-60% of this move would earn your keep. Plus, you can "tame" the leverage inherent in futures contracts if you really want. More on this later… first, let's see where wheat is going next.
Are wheat prices reversing higher? I think so, but I'm still holding out a bit longer… waiting to see confirmation. Ideally, I'd like to see December settle above the downtrend line (white), which is currently 15 cents overhead. If this turn unfolds, I see no problem in getting back up to the 50% Fibonacci retracement (middle dotted line), which would put December futures around $8/bushel.
All grain markets got creamed (like southern corn) last week after a bearish USDA report. New crop wheat contracts got knocked 8% lower. This brought December wheat under $7/bushel for the first time in 11 months. Coincidence or not… the last time wheat poked below $7, it spent just a day there before mounting a monster rally back up to $8/bushel within two months. Will history repeat itself? We'll see… we're always reminded: past performance is not indicative of future results.
Within the Ag sector, wheat made the strongest bounce off recent lows. Doug Bergman, my in-house grain analyst, told me this morning he feels much of the current strength is coming from the unwinding of spreads. We should get a clearer picture when both corn and wheat crops go in the ground in the coming weeks. Expect corn and wheat to trade in tandem. Thanks to the USDA-driven fire sale, I see current prices as a good starting point for wading into bullish trade in new crop corn and wheat. Use the Fibonacci levels as profit targets.
Now back to leverage… Leverage can be scary for uninformed traders. But hey -- who says you have to use all the leverage built into futures contracts? Instead of allocating just $3,000 per contract, which puts your leverage around 12:1 (or 12x)… you can lighten up by allocating more equity to the trade. Putting up $36,000 per contract brings your leverage fully down to 1:1 (based on current prices of $7.20/bushel). Of course, there are shades of grey all in between. Most of my clients use a little leverage. After all, it's one of the attractive components of futures markets, in my opinion. As always, risk management is key.
Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.