Wheat finally breaks resistance
Wheat markets had a strong day on Friday, finally pushing above the old double bottom major resistance that had held the market for several weeks. In the process, it also confirmed the weekly reversal from the week prior, setting the stage for more upside as the technical picture starts to look more like a bottom has formed, at least for the near term.
Outside influences may have had more to do with the rally than wheatâ€™s own fundamentals, but nevertheless the market is showing signs of strength. The huge short position of the hedge funds had made traders nervous for weeks; and with Friday's announcement of regulatory smackdowns by the CFTC to Goldman for fraud in sub-prime securities and for JP Morgan breaching position limits supposedly to chase stops in the silver market, the hedge funds associated with those firms reportedly were in liquidations mode.
And hedge fund liquidation mode in wheat means buying to cover their shorts. With volume being down over the last few weeks, it doesn't take much to create a strong updraft in the market. That has been the main concern of many analysts, that with record short positions in the wheat market by the hedge funds, if they decide to head for the door it could become a tight squeeze for them, especially in a relatively small market like wheat. It is worth noting that the hedge fund short position was down about 6% as of only Tuesday, according to the Commitment of Traders report released on Friday.
Fundamentally, the wheat crop here in the US looks very good for the most part. Moisture is not a problem for most wheat regions, except in the Northwest. But there is growing concern about disease pressure in the southern and central plains. Rust is showing up in varieties that had been considered resistant, so the potential is there for a large outbreak as the weather continues to be wet for most of the southern plains.
China weather continues to be mixed, with the far southern regions of winter wheat country still caught in major drought which is projected to cut yields in half. China is offering subsidies to farmers in those provinces to help with the losses. To date, the major winter wheat growing region of China is reportedly in good shape, but obviously that situation will be watched closely as the drought is right next door.
India's harvest is complete in most regions but a major heat wave in the last couple of weeks is expected to cut yields in the later maturing wheat. They had expected to cut a record crop of 82 MMT, but now are projecting that total production will be reduced by about 1.5 MMT. Of more importance, however, is the potential for another drought riddled summer crop season, which is what led to the jump in winter wheat plantings in the first place. For the world's second most populated country, two summer crop shortfalls in a row will create a very difficult situation, even if wheat stocks are huge.
Technically, the market appears to have confirmed at least a short term bottom, which could create additional buying from those that have tried to press the short side. The next notable resistance now shows at the 5.35 level on Chicago July. I expect that the rally will continue to at least test that resistance.