When to Feed the Ducks

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

The best opportunities are the ones with the most clearly defined risk characteristics and most favorable risk/rewards.  

This summer, Minneapolis Spring Wheat was offering us a trade set-up with both these qualities. Price had just resolved higher from a near decade-long base and was trading at its highest level in 8 years. We were buying the breakout.

Fast forward to today and our initial profit target has been met and we’re locking in gains.

In today’s post, we’ll take a step back, review our trade, pinpoint current levels of interest, and discuss how we’re managing the position moving forward.

First, let’s look at the weekly chart of Minneapolis Wheat futures:

Back in July, we were buying the breakout above a key retracement level that had acted as resistance since 2013. Our line in the sand was ~825.

We remained long into Q4 as price was resolving higher from a running wedge just above that critical level.

It’s typical to see this type of price action within an ongoing uptrend. The reason we call these “continuation patterns” is that they tend to continue in the direction of the primary trend. For Wheat, that direction is undeniably higher.

With that said, our target has been achieved and price is finding resistance at its highs from over a decade ago. This is a great place to feed the ducks and let the dust settle.

That doesn’t mean we can’t be long again in the future. It just means we are paying ourselves right now.

This course of action makes even more sense when we zoom out:

Price stopped and reversed at this same level after a similar v-shaped rally in 2010. It happened again in 2012. These former highs also coincide with the 38% retracement of this massive base. 

The bottom line is there is significant price memory around 1050, making it a logical level for some consolidation.

Our target has been hit, and price is at potential resistance. This is our cue to step away and look for opportunities elsewhere. It’s incredibly difficult to do at times, especially when spring wheat is up almost two dollars the last two months. But if we want to have staying power as investors, we have to be disciplined and respect our process.

As long as Mpls. wheat is below the upper bounds of this basing pattern, we don’t want anything to do with it. 

Is the underlying trend still intact? Yes.

Could it continue to rip higher? Sure.

But we don’t know what’s next. All we know is our target was hit and price is consolidating below our risk level. We can buy it again if and when there is a valid upside resolution above 1050.

For now, we’re on the sidelines.

Are you feeding the ducks with us?

Let us know. We love hearing from you.

COT Heatmap Highlights 

• Minneapolis Wheat: Commercial hedgers continue to add to their shorts. They are the most net short in history for the fourth week in a row.
• KC Wheat: Commercials another 4,119 contracts to their short positions this week as they near their three-year record. 
• US 10y T-N: Commercial hedgers are the most net long in three years. 
• Coffee: Commercial short positioning increased last week to just 3,000 contracts shy of their historic level.

Thanks for reading, and be sure to download this week’s Commodity Report below!