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Historic Buying Opportunity in Wheat

Wheat prices have continued to fall in June and July, bucking the trend in overall commodity prices. While wheat has yet to rally like other commodities such as soybeans, oil, gold and silver and sugar, that doesn't mean that it won't. Each market has its own tendencies, and while sometimes those tendencies align, other times certain markets will buck the trend for a while. That is the case with wheat.

Based on historical bear markets, both in percentage declines and duration, wheat is likely in a bottoming phase. 55% of historic bear markets in wheat have ended between June and September, giving us a rough guideline for how long this bottoming processing could last. The price could oscillate around the 430 on the December contract until September, but is likely to start rallying by then, or before then.  In terms of percentage, the wheat decline has exceeded nearly all historic bear markets, putting it in one of the most oversold conditions in history. That helps confirm a bottoming process completing by September, with minimal downside left.

Figure 1. December Wheat Daily Chart

Since the bottoming process may take another month or two, it may take a couple entries (and small losses) before a bigger up move develops. Since July, on the December contract, the moves to the downside have barely made new lows, indicating selling is slowing. Therefore, consider a purchase when the price rallies above 446, with a stop loss below the August 12 low of 425.25. That is a little more than 20 risk, for significant potential upside.

Following a bear market of this magnitude the minimum projection (based on historical rallies following a bear market) is near 530 on the December contract. A more typical rally following this type of bear market puts a target in the 600 to 620 area (December contract).

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