The wheat markets have provided an interesting setup as of late, continuing to trade in a range bound by its symmetrical triangle pattern. The next few weeks could be very telling for the medium term direction of wheat. Chicago Wheat in the short run has been constrained by this symmetrical triangle for the past six months. I feel that a breakout in either direction will be followed by funds either buying or selling the momentum depending on whichever direction the prices break.
From analyzing the short term price action, we can see the very well defined symmetrical triangle. Based off of past experiences with these kinds of patterns, we normally see lower volume and price range until we get the “pop” that pushes the price above the higher trend line (or below the lower trend line). The “pop” can be confirmed from above average volume (above 30K in this case) along with a close above or below the corresponding trend lines.
The breakout players will wait until they get their confirmation to get long or short. For example, they will buy the break of the upper end of the trend line and place a stop at or below the lower trend line. This will provide ample room for the trade to work. With this break out play, we hope the market will rocket higher; however, if it doesn’t, it’s important to have yourself covered.
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
If you want to get a position on ahead of the move, a way to participate would be to buy a straddle. This is an option position that will involve the simultaneous purchase of both a call and a put. For example, the trader would buy a July Wheat 680 call for 39 cents and buy a 650 put for 39 cents (prices quoted at time of publishing). This is a fixed risk position, limited to the total premium paid out. After the break occurs, the trader would hurry to lift the call or put — whichever is opposite to the market move. If the price of wheat breaks over the upper trend line, sell back the put immediately. If the price breaks lower, get rid of the call. Ideally, this breakout will be violent, offsetting the losses taken on the underwater option with big gains on the option that makes money from the breakout.
If the market would break out to the downside, I would encourage traders to think about turning the trade into a spread by selling a put against a long put or a short futures position (known as a covered position) as contract lows are lurking about 40 cents below the breakout point. In my opinion, this strategy will be very supportive. These types of strategies require a bit of planning ahead of time, so get ready for the breakout as it could happen at any time.
For further explanation of this strategy, please contact us at +1.800.800.3840. We promise to listen first and talk straight.
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