Wheat struggles to hold support
It was another very choppy week (last week) for the wheat complex as it tried to continue higher in this short term bullish formation, but a sharply higher dollar on Friday pulled wheat below the first level of support and prices quickly retraced to the key support established just last week.
A very positive jobs report propelled both the Dow and the dollar sharply higher, two markets that have moved inversely for months. But the trade viewed the strengthening economy as a sign that the FED may increase interest rates sooner rather than later, and dollar bears headed for the door.
The chance that higher interest rates could be coming soon would certainly change some of the strategies of hedge funds as they would be less inclined to buy riskier assets like commodities and move to the safety of the dollar. In addition, there would also be a great deal of 'dollar carry' unwinding, which would create further strength in the dollar. It would also mean more commodity trade unwinding (liquidating) if, indeed, the dollar has turned a major corner and is headed higher.
That could spell trouble for the wheat complex, which has seen the bulk of its strength lately on the weak dollar, low interest rates, and fund buying as they continue to move their money into the commodity space. The fundamentals for wheat have been decidedly bearish for months, and little has changed from a fundamental perspective.
That said, one does need to be careful about pushing the bearish argument for too long, as has been my thinking for the last couple of months. This market has seen a $9 sell-off over the last year and a half, and is certainly due for an extended correction; which is what I believe we have begun with the October low. There is still plenty of time and room on the upside in the wheat complex to correct this huge sell-off.
But the negative fundamentals are hard to fend off when the few bullish reasons appear to run out of gas, which is what happened on Friday. Funds have not shown up in their usual early month buying spree, and front runners had no back-up, which contributed to the liquidating sell-off in the last half of the week. It is entirely possible that funds will take the month off, wait out the holidays, and then begin their January portfolio adjustments which supposedly will include more long positions in the grains.
The short term bullish technical formations are still intact, but we're within a dime of testing major support, so next week will be watched very carefully. If those supports are taken out, then we're likely heading to the November 2 low of 5.07 on Chicago March. If those near term supports hold and wheat manages to resume its uptrend, then the recent highs should be taken out, with 6.40 still being the target on Chicago March.
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