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Wheat reverses from contract highs

Wheat managed to continue its rally early in the week, but definitely with less enthusiasm than the previous few weeks. A short-lived pop into new contract highs was met with a wave of selling that gave us a key reversal down in Kansas City, a major reversal in Chicago and a double top in Minneapolis.

Liquidity has become a serious problem at the Chicago Board of Trade, from a significant drain of locals' capital over the last three weeks. The resulting volatile swings from what used to be ordinary order flow are making it very difficult to trade front month Dec Chicago wheat, and that volatility is finding its way to the other months and markets as well.

The market has the feel of having 'cleansed' itself, at least for now, setting the stage for a downward correction. However, while we have come off the contract highs and confirmed the key reversal, the selling isn't with the kind of pressure we were expecting to see after such a sharp rally. We keep holding our breath, waiting for the meltdown that is 'sure' to come after the major updraft. But, to date, we're still waiting; and it has to make one wonder that if the selling hasn't gained serious momentum by now, maybe it's not in the cards-just yet?

The general consensus seems to be that the next wave higher will be led by cash, with the basis finally regaining its composure and leading the charge into new highs. But, basis won't perform until the demand fires get stoked, which we have yet to see. Buyers are more apt to stand aside and hope prices retreat than panic and get aggressive with purchases. With US prices now the highest in the world, we'll see demand go to other countries while their supplies last or until prices equalize.

Of course, demand talk still centers on the Australian crop disaster and the re-allocation of what would have been their export program. And this question lingers, will they be able to deliver on current obligations? We can presume there won't be any significant new contracts offered from them. India still has 800,000 MT of Australian wheat due for delivery, but they reported this week that they are confident the contracts will be honored. They also reported that the last three cargos from Ukraine had been delivered, and the recent export license requirements from Kiev had not caused any problems. India expects that all of their 5.5 MMT of wheat imports will be delivered by Feb, '07.

Export sales are okay at best, well behind last year's pace; but that stands to reason considering we have less to sell. Last week, export sales were 445,000 tons, within trade estimates, but not enough to add any energy for the bulls. The bears got some encouragement from the EU, however, as they released 1.08 MMT of wheat from their intervention stocks into their domestic market. It certainly had a dampening effect on European wheat prices, with some spillover into world prices as some fear that the wheat could eventually find its way into the export channel.

We did see Iraq announce another tender, but when it typically takes weeks for those purchases to develop, the market doesn't get too excited about it. Egypt bought another 180,000, of which 60,000 was US soft white and 120,000 French wheat. We'll need more aggressive demand to show up for US wheat before we can get the basis back on track and leading us higher.

So, where does wheat go from here? Fundamentally, we need to feed the bull every day to sustain these kinds of price levels. The market has factored in the very tight stocks here in the US and worldwide. While most minor exporters have cleaned out their bins, we haven't seen the major demand materialize. Buyers will wait as long as possible at these prices, but will certainly be present on the price breaks until the new crop is secured in May. The demand will come eventually, which I believe will drive the next leg up. Look for more of a correction in the short term, but with the absence of the Southern Hemisphere's supply this fall, we should see the market resume the uptrend as we head into the winter months.

Technically, we have major reversals confirmed and the appearance of at least an intermediate term top. In KC Dec, look for support at the swing low of 5.16, then the former gap and trough at 5.12, followed by the swing low of 4.975. Look for resistance at the swing high of 5.40, then the contract high of 5.55. In Chicago Dec, look for support at Friday's low of 5.025, then the breakout of 4.87, followed by the gap and trough from 4.77- 4.80. Look for resistance at the swing high and trough of 5.29, followed by the contract high of 5.57.

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.

Wheat managed to continue its rally early in the week, but definitely with less enthusiasm than the previous few weeks. A short-lived pop into new contract highs was met with a wave of selling that gave us a key reversal down in Kansas City, a major reversal in Chicago and a double top in Minneapolis.

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