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Wheat breaks down

The wheat complex broke hard last week, taking out key support levels with gap action, sell stops and major long liquidation. After weeks of chopping around in a trading range, prices finally broke out, unfortunately to the downside.

Neither corn nor beans offered any support as they, too, broke through support levels and look poised to see more correcting in the near term or themselves move into a trading range as they work through the holiday trading season.

Funds were major sellers last week, as they took their positions sizes down before overall trading slows down in the second half of December. There has been plenty of talk around the marketplace about a large increase in fund money coming into commodities after Jan 1, with corn ranking high on the list. As if fund influence weren't already huge, and with corn being particularly influential for wheat this year, the tendency for funds to be mostly buyers could set the stage for solid support on breaks in both corn and wheat after the holidays.

But the break that both of those markets experienced last week is having more impact right now than the prospect of fund buying three weeks from now. The quality markets of KC and Minn broke key support levels, with KC giving us a major gap in the process. Chicago actually held its major swing low-so far. That kind of chart damage is tough to swallow if you're a bull, and positive fundamentals are hard to find.

USDA issued their monthly supply/demand report this morning, with few surprises. The trade was not expecting any changes to domestic yields or production and they were right. They did expect a reduction in US wheat exports and they were right there as well; our exports were lowered by 25 million bushels and with a 5 million bushel increase in food usage, total 2006/07 wheat ending stocks were increased by 20 million to 438.

World wheat production was increased by 2 MMT coming from Argentina and Canada with 1 MMT each. World ending stocks were also increased 2 MMT. Argentina dodged a bullet this year as they started out dry, similar to Australia but managed to get the timely rains and produce a pretty decent crop. Their export estimate was thus also increased by 1 MMT to 9.5 MMT, higher than last year and right in their average range. Canada's export estimate was left unchanged at 20.5 MMT, despite the increase in production.

It was interesting to note that USDA did not increase the production or export estimates for the FSU, which comprise mainly of Russia, Ukraine and Kazakhstan. Russia in particular has been a persistent competitor for export business even though they had a relatively short crop this year. Having said that, it was just this last week that their offers to Egypt were well above other offers, possibly suggesting that their stocks may finally be getting too tight to be aggressively exported. It was also encouraging to see the US finally capture at least some of that trade with sales of soft white and soft red wheat.

It is widely expected that trade will slow to a crawl during the holidays, which it usually does. One cannot get complacent, however, considering the size of the fund involvement and the declining number of traders that will be in the pits in late Dec. One large order could create big moves and wreak havoc with positions. We have to be extra careful with trading and position size during the holidays.

Technically, look for support in KC March at the trough of 5.045, then the breakout and swing low of 4.97. Look for resistance at the major breakout/old swing low of 5.17, followed by the gap from 5.27-5.30. In Chicago March, look for support at Friday's low and swing low of 4.85, followed by the trough at 4.70 and then the swing low of 4.605. Look for resistance at the breakout of 5.00, the next breakout of 5.11 and then the swing high of 5.25.

This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. Futures and options trading always involve risk of loss.

The wheat complex broke hard last week, taking out key support levels with gap action, sell stops and major long liquidation. After weeks of chopping around in a trading range, prices finally broke out, unfortunately to the downside.

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